the top of the structure. “The lack of a new issuance market puts the brakes on things,” Chin says. “Basically, we are kicking around whatever might be available in the secondary market. Everybody is trying to do the same thing in terms of looking at more sea- soned issues that were perhaps done in a more stringent underwriting environment.” Another trend hampering CMBS deals is the reluctance of invest- ment banks to warehouse loans on the books while they gather enough commercial mortgages to package into a security deal. Since investment banks have deleveraged their balance
sheets in the wake of blowups such as Bear Stearns and Lehman
Brothers, they are less willing to take on warehouse risk.
“There is not enough collateral making its way through the
system for these banks to take on that risk,” says Kevin Riordan,
president and chief executive officer of CreXus Investment
Corp. (NYSE: CXS), a commercial Mortgage REIT specializing
in real estate debt.
Investors are also wary of the conflicts embedded in the structures of securities. “B-piece” holders of debt—those owning the
lowest tranches—often would rather delay foreclosure on an
asset, because they are the first to sustain losses in the event of a
default. Senior debt holders often want to foreclose.
“Seniors will often complain to the special servicer, which is
usually controlled by the very bottom piece, that it should just
foreclose and take the property,” says Joseph Forte, partner with
law firm Alston & Bird.
B-piece holders of CMBS also have been free to sell their
ownership, with their tranches often being wrapped into collateralized debt obligations (CDOs).
All told, more restructuring needs to be done to stimulate the
flow of CMBS, according to Shekar Narasimhan, managing partner of Beekman Advisors. “These are the kind of structural issues
that require debate and resolution in a very transparent manner,
before you can see the rebirth of 2.0 securitization,” he says.
Deals Still Getting Done
Nevertheless, the investment banks are getting things moving
once again, an improvement over how things have been.
About $8.9 billion in deals were completed in the first half of
2008, according to Trepp data, followed by no traffic at all. It was
a far cry from the $207 billion securitized in 2007. Without a normal functioning market, CMBS sold on the secondary market for
as low as 50 cents on the dollar.
CMBS did not revive until late last year, helped in part by the
federal government’s Term Asset-Backed Securities Loan Facility (TALF), a program that was designed to get the securitization
market back up and running after its collapse.
TALF helped in part with a $400
million securitization by Goldman
Sachs of a loan it made to Developers
Diversified Realty (NYSE: DDR).
The DDR deal was backed by 28
shopping centers, with 6. 1 million
square feet in 19 states and Wal-Mart
stores representing about 10 percent of
the portfolio. The Goldman deal was
followed by another single-borrower
transaction in December, when JPMorgan sold a $500 million issue backed by
retail properties of the Inland Western
Retail Real Estate Trust. These early
deals helped establish price discovery in
the market, which hadn’t existed after
the freezing of the credit markets.
It wasn’t surprising REITs were the first to do deals. Their
balance sheets are stronger than other real estate owners, notes
Sullivan of Green Street. REITs have lower leverage ratios, and
showed their ability to raise capital after the markets froze, turn-
ing to equity, preferred equity and unsecured debt. They have
also tapped life insurance companies. “REITs are in an enviable
position of having access to capital,” Sullivan says. “Those with
the best access to the cheapest capital tend to win.”
This year, the first conduit loans since 2008 have followed.
Royal Bank of Scotland closed a $309.7 million securitization
deal in April, representing six loans total. The security is backed
by 81 commercial properties in states such as Texas, New York,
Missouri, Wisconsin and New Jersey. The $222 million AAA
bond priced at 90 basis points over swaps.
JPMorgan followed in June with a $716.3 million deal, representing 36 loans and 96 properties. The three AAA classes were
spread at 140, 160 and 165 basis points over swaps.
Along the way, trophy properties have received the lion’s share
of attention. The Durst Organization and Bank of America Corp.
went to market with a single property deal in June, with a $650
million CMBS deal for Bank of America Tower at One Bryant
Place in Midtown Manhattan. The 51-story, 2. 35 million-square-foot building serves as Bank of America’s headquarters.
So while it’s all far from the volume of three years ago, optimists
say pent-up demand for CMBS will boost activity further. Perhaps
it will eventually reach an annual pace somewhere between today’s
volume and the $200 billion plus in 2007, notes Sullivan. “We are
very early in the process of many of the CMBS machines that were
dismantled being put back together,” Sullivan says.
Others agree. “At some point the markets have to start functioning normally,” says Manus Clancy, managing director of Trepp.
“There is just not enough capacity within the insurance companies
and other lenders to fully fund this marketplace. At some point
securitization has to become a significant percentage of lending that
goes on in these markets.” F