Greg Greene is a Senior Vice President in CBRE's Debt & Equity Finance and has a long, successful career in the capital markets. Greg attended the recent MBA conference and was great enough to share his thoughts with us, which we are providing to our readers. We have put in bold several of Greg's points we found most interesting or telling about where we are today and italicized our thoughts.
Mortgage Bankers Association Conference Overview:
The spirit of the conference was one of optimism; however some anxiety remains as the difficulties of 2008 through early 2010 remain fresh on the minds of most lenders.
• There is a very substantial amount of capital committed to commercial mortgages in 2011.
• Most lenders are concerned that there will not be enough product to absorb the capital committed to these mortgages. This is a continuing problem throughout the commercial real estate market, not just on the financing side. We consistently find demand outpacing supply. This is changing, but we believe all of 2011 will be needed to re-balance the market.
• Life companies have a large appetite for commercial mortgage placement due in part to the fact that the yield on these mortgages is favorable to the yield on corporate bonds.
• Some money center banks are starting to quote non recourse deals for ten year terms, making them more competitive with life companies and CMBS at the longer term.
• Many lenders stated this is starting to feel somewhat like 2005.
• The CMBS platforms are very active and their underwriting is reflecting the competition in the marketplace. This does not imply that the CMBS lenders or others are engaged in loose underwriting, but the box is certainly expanding for the definition of a “financeable” deal. This is good to see. A year ago, we felt lenders were too confident, which borrowers did not appreciate.
• Numerous lenders expressed some doubt that all the current CMBS platforms would survive. The expectation is for mergers and for a few to drop out as volume is not sufficient to warrant the continued investment in the platform.
• Lenders are exploring ways to improve yield and get more money invested. There is a wide expectation that bridge loan opportunities will provide this outlet as debt is provided for assets that must be repositioned or assets that will be released from the commercial banks currently holding those assets.
• There is a desire (hope?) that the commercial banks will begin to more aggressively sell off the real estate assets they hold. The banks have seen a material recovery in the value of many of those assets and many of the banks are now in a better capital position to sell the assets and absorb a much reduced loss. However, like it or not, most people believe that “kick the can” has served the banks and the industry rather well over the last two plus years. We have already seen a pick up in requests from commercial banks to start moving, or at least to begin valuing, under performing assets. We hope the "pretend and extend" phenom is over.
• Many lenders stated that real estate values have recovered faster than anticipated in many markets.
• The CMBS platforms and a few life companies stated they will finance to a 75% LTV. This confirms what I am currently seeing in today’s market.
• Some lenders will provide forwards---but this number is relatively few and the number of months to go forward is limited.
• A substantial amount of capital is dedicated to mezz debt. Rates start at around 8% and increase from there with a rate of 8% to 10% prevalent for deals in the 70% to 80% LTV range. Terms range as long as ten years.
• Most lenders expect more dispositions from special servicers throughout 2011.
• Most lenders remain underweighted in industrial mortgages and would very much like to add industrial to their portfolios.
• Some life companies have become very competitive with Freddie and Fannie and are now winning business from the GSEs. Considering that Congress is upended the GSE's, this is probably a good thing for the real estate market; unless of course we're going to see pricing from the GSE's go up as the government guaranty subsides.
• Many lenders maintain a preference for the mezz debt structure instead of the preferred equity structure that gained some popularity in the preceding months.
• The current recovery remains a jobless recovery and there will be no real economic recovery until the U.S. can generate jobs. The recent positive jobs report for January is already being refuted by numerous sources that consider it more “accounting trickery” than fact.
• The “joke” coming out of last year’s MBA was that loan spreads fell 50 basis points in the three days of the conference as everyone realized how much money was re-entering the commercial mortgage market in 2010. The “joke” this year is that the previously held expectation of $50 billion in CMBS lending in 2011 has now become $70 billion. We shall see, but don’t be surprised. This remains very light compared to the $250 billion plus for CMBS issuance in 2006.
With all this said, expect the following as we get further into 2011:
• The competition for new loans will intensify. Lenders will increase LTV’s, finance more non-core assets, provide a longer interest only period, enter more tertiary markets, accept lower DSCR, etc. These are the logical actions for an industry that likely has more debt capital available than deals to absorb that capital.
• However, do not expect silly lending practices. The mortgage industry is filled with smart people who remain cognizant of the lessons of the recent past.
• CMBS will be very competitive and will provide much of the needed capital to finance lesser quality assets and quality assets in tertiary markets. Expect CMBS loan spreads to fall as the year progresses.
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