10.6.10: Resurgent CMBS Market No Cure-All for Troubled Borrowers

A projected threefold increase in securitized lending next year would boost spirits among prospective borrowers but do little to help the majority of commercial real estate investors obtain financing, experts say. Issuers of CMBS continue to shun riskier secondary markets.

CMBS issuance nationally totaled $3.9 billion in the first three quarters of 2010, already putting this year’s issuance ahead of the $3.1 billion recorded in all of 2009, according to Standard & Poor’s Ratings Service.

In 2011, a surge in new loans is expected to push CMBS issuance to $35 billion for the year, according to the rating agency in a June 30th report.

“We’re already seeing some momentum for the fourth quarter,” says James Manzi, Senior Director of global structured finance research at Standard & Poor’s. Issuance in the fourth quarter is projected to be $6 billion, predicts Manzi, who authored the report.

At that pace CMBS issuance would total $24 billion in 2011, but Manzi increased his projection by $11 billion based on feedback from lenders who plan to ramp up originations in the coming months.

The forecast calling for $35 billion in CMBS issuance in 2011 will have ripple effects that increase the availability of funding from other sources, according to Bill Hughes, Senior Vice President and Managing Director of Marcus & Millichap Capital Corp., a financial intermediary based in Encino, CA.

Although Hughes is pleased with recent gains in securitized lending volume, he is waiting to see if the underwriting criteria is extended to include a wider swath of properties as collateral. And he is not alone.

Challenges remain.

Issuers’ narrow focus on high-quality, stabilized assets in prime markets is the main obstacle to renewed CMBS volume, according to Paul Mancuso, a vice president with third-party research firm Trepp LLC.

New CMBS deals are backed almost exclusively by the upper crust of commercial properties, all stabilized assets that command excellent locations in prime markets. By definition that excludes investors with properties outside the major markets or with properties operating with some level of vacancy.

“We have yet to see new origination or refinancing activity trickle down to secondary and tertiary properties from suburban locations,” said Mancuso.

Conservative underwriting is keeping CMBS loans out of most borrowers’ reach, according to Sam Chandan, Global Chief Economist at New York-based Real Capital Analytics.

“The question is, are the CMBS players going to be willing to move into tertiary markets? Are they going to move into properties with occupancy levels that are a little bit down?”

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