“It can be little things, but more lenders are willing to go out of
the box somewhat to win business as competition intensifies.”
Of course it’s not just standardized paperwork that is driving this
trend. In general, the CMBS market is hitting new post-crisis high
notes thanks to improving fundamentals, an improved economy
and the prolonged low-interest rate environment, which has also
fueled alternative and competing forms of finance.
“Conduits are competing for every last scrap,” Ray says.
If this sounds painfully familiar, that’s because it is yet another
chapter in the never-ending story of CMBS (well, all markets actually). The market moves—sometimes dramatically, sometimes not
–between risk and safety depending on larger macroeconomic
conditions, fundamentals in commercial real estate and what the
competition is doing.
For now, the center appears to be holding sway.
“You want issuance to climb and a steady pace and not spike—
and so far that is what is happening right now,” says Steve Renna,
CEO of the Washington, DC-based CRE Finance Council. Third
quarter 2014 saw a robust $22 billion in CMBS issuance, he says,
and puts the industry on track to meeting a psychological post-crisis high-note of $100 billion. “That will exceed by a healthy margin
the $81 billion we saw in 2013,” Renna says.
The State of the Market
This is not just a numbers story, though. CMBS is clearly on more
solid footing than it has been since the crash. Originators are using
more prudent assumptions in their underwriting and credit
enhancements have risen to reflect declining credit profiles and
the rise in leverage levels.
In fact credit enhancement levels in US
CMBS are close to double those in 2006 and
2007, a recent Fitch Ratings report noted.
CMBS has also been bolstered by improving
fundamentals, which is reflected in the overall improvement in asset performance.
Commercial real estate performance and
macroeconomic measures have slowly
improved over the past few years, Fitch
Ratings noted, “providing stable occupancy
and, for hotels and multifamily properties
especially, significant improvement in revenues.” Besides the general economic
improvement, Fitch also pointed to the limited new property construction as playing a
role in asset performance.
Also, pool structures have become simpler
in many cases. Fitch Ratings notes that we are
seeing less “hyper-tranching” and that oper-
has made it
for conduits to
documents to win business.
The end result is that the plain
vanilla CMBS is now very
much a commoditized
business and those who want
to get deals done need to do
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