Tag Archives: cmbs

CMBS – Commercial Real Estate Mortgage Backed Securities

The market for commercial mortgage-backed securities (CMBS) already is in the midst of repricing assets and setting new standards for future loan originations.  CMBS will come back as a significant lender for commercial real estate, but with new guidelines.

In the future, CMBS conduits are likely to make smaller loans than they did before and the debt will not be sliced up and repackaged in as many securitized bonds as the industry had seen during the past few years.  There will need to be more due diligence requirements for originators that are similar to what they have in the stock market.  Perhaps the originators will have to keep some interest in the loans they sell so they keep a stake in how it performs.

Availability of debt is a crucial factor in determining real estate pricing and capitalization rates.  With all else being equal, higher debt availability at lower rates implies increased investment activity, which in turn bids up prices of real estate assets and exerts downward pressure on capitalization.  Conversely, lower debt availability means lower asset prices and higher capitalization rates.  Additionally, less transaction volume and rising vacancies will contribute to reduced pricing of commercial real estate properties.

CMBS Market in the Dumps!

Investors have showed minimal appetite for commercial mortgage backed securities (CMBS) in recent times with only $10 billion in US CMBS issues in Jan-Apr 2008. Volume is a fraction of the $79 billion in bonds that sold during the first four months of 2007 according to Commercial Mortgage Alert.  The general consensus at the Commercial Mortgage Securities Association meeting in New York last week was that an estimated $50 billion of CMBS will be issued in 2009 versus $224 billion in 2007. This volume would put production in line with 2002 levels of $52 billion.

Experts say a likely upswing won’t occur until early 2009 at best at which point CMBS bond prices should be stable enough for investors to jump back in.  However, CMBS fundamentals are quite healthy and the delinquency rate is only 0.35%!

As a result of the credit crunch, total commercial real estate transaction volume is off 74% YTD as of April 2008 compared to 2007 levels. Until capital is more readily available transaction volume will likely remain slow.