After a complete shutdown in the market, issuance of commercial mortgage-backed securities (CMBS) has hown new signs of life this year. The volume of CMBS transactions, however, remains far off previous norms. A series of CMBS deals have helped break the logjam experienced in the market in 2008 and 2009, indicating that investors are willing to buy new se- curities, so long as the pricing and risk are right. In the second quarter of 2010, two multi- borrower deals were the first of their kind since the collapse. Royal Bank of Scotland completed a $309.7 million securitization deal in April representing six loans. JPMorgan followed with a $716.3 million securitization in June. All told, issuance rose to $5.3 billion in the second quarter, up from zero for the same period a year earlier and $1.6 billion in the first quarter, according to Trepp, a New York company that tracks the commercial property market. With each deal, investors have grown increasingly at ease with the securities. “The market is becoming more comfortable taking on risk on a very linear basis,” says Doug Tiesi, head of the North American real estate advisory practice at Royal Bank of Scot- land. “We are re-establishing underwriting standards and control rights within securitization. The business is reconstituting with each step each bank makes.”
Much like their residential mortgage-backed cousins, commercial mortgage-backed securities are bundles of loans, secured by offices, retail properties, hotels, apartment buildings and
industrial properties. CMBS issues usually have multiple tranches, where each level represents a varying degree of risk and reward. They are typically structured as real estate mortgage
investment conduits (REMICs), a legal structure that allows the security to be treated as a
pass-through entity, meaning it is not subject to tax at the corporate level.
In another early sign of a revival for CMBS, investment banks are starting to ramp up their
hiring of specialists who package commercial real estate loans into bonds. For example, investment banking units at Wells Fargo & Co., JPMorgan, Jefferies Group Inc. and Deutsche
Bank all have recently added staff.
Volume is a fraction of what
it was three years ago before
the credit crisis. In 2007, $207
billion in CMBS were issued,
according to Trepp. Now,
the economy has held back
any steep rise in current
volume. Real estate fundamentals such as sluggish
rents, higher vacancies and
job losses have added to the
woes of many real estate owners.
Nevertheless, there’s still an appetite
for CMBS, notes Michael Ashner, chairman and chief executive officer of Winthrop
Realty Trust (NYSE: FUR), which invests in CMBS and other kinds of real estate
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