Last year at the MBA Commercial Real Estate Finance Convention (CREF) “cautious optimism” prevailed regarding CMBS conduit originations, tempered by disappointment in the size of the minimum loan balances sought by CMBS conduit originators ($20mm and up), required debt yield (13%-14%) and conservative underwriting.
This year, “cautious” is gone; the word is “optimism.” With the lack of significant new issue supply and the Federal Reserve continuing to push interest rates lower, bond buyers are starving for well-structured product like CMBS, which can provide decent yield. As a result, spreads and interest rates continue to decline and origination shops are desperate for loans to fill their CMBS pools. Loans down to $5 million are now routine, debt yields in the 11% area are prevalent, and leverage is creeping up.
“All of our investment banking relationships were hitting me up for loan product,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “A $5-million loan size? No problem. Tertiary market? No problem. Hospitality? No problem. It was all music to my ears,” said Sneden.
The question is: Will the enthusiasm and CMBS market have legs? I think a comment by Michael Cohen, Executive Director of UBS Securities LLC, is particularly on point. He said, “I am confident that the market will be great for the next 30 days.” Market gyrations make it impossible to predict the future.
“So in the short run we will make hay,” notes Jim Brett, a senior loan underwriter at ValueXpress, “and push as many CMBS conduit loans through the system as fast as we can.”