The CMBS conduit loan machine is cranking full tilt, according to participants at the 2015 MBA Commercial Real Estate Finance Convention (CREF) held recently in San Diego, California. This year’s CREF panelists suggested volume of $125 billion in CMBS originations should be easily achieved if rates remain close to current levels. But the panel was concerned about deteriorating underwriting standards and competition compressing profit margins, a recurring theme from last year.
Opinions on what is expected in 2015 in the CMBS market, both on the origination side and securities side of the business, were shared by Chris LaBianca, Managing Director at UBS; Brian Furlong, Managing Director at MetLife; Ted Borter, Managing Director at Goldman Sachs and Jeff Fastov, Managing Principal at Square Mile Capital Management on the panel, “The State of CMBS Lending: The Capital Markets Perspective.”
It was widely recognized that credit standards continue to weaken. From a bond buyer’s perspective, Brian Furlong said he was somewhat comforted by the increasing levels of subordination that rating agencies are requiring on CMBS bond classes to reflect worsening credit. “I think the rating agencies are actually doing a pretty good job this time around increasing subordination,” commented Furlong. “This is exactly opposite from the 2005-2007 period, in which subordination remained relatively unchanged as credit metrics fell, as the rating agencies were unwilling to adjust levels upward in fear of losing market share. We are very comfortable that the ratings reflect the appropriate risk at the top of the bond stack (senior AAA-rated CMBS).”
At the below investment grade CMBS credit spectrum, Jeff Fastov, an experienced investor in the CMBS “b-piece” market, said, “The b-piece bond buyers are also providing pushback on deteriorating loan underwriting as they become more active in “kicking out” loans that they feel are poorly underwritten or reflect weak collateral. This is generally providing a floor on how far underwriting can deteriorate.”
All the panelists concurred that the reported 36 active conduit programs are more than required to serve the CMBS loan origination market and are contributing to profit compression. “The large amount of active programs is terrific for borrowers,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “Borrowers are able to pit one program against another in terms of pricing and structure to get the best possible deal.”