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.
“will not be sliced up and repackaged in as many securitized bonds”? this is the definition of CMBS – slice up the cash flows into securitized bonds… unless you mean CDOs of CMBS (which truly can be horrible).
“keep some interest in the loans ” will not work. It is one of the solutions on the table being discussed, but it has a fatal flaw. They’ll just value their interest at $0, and if it works out, then great. ABS trusts have residual interest that originators would retain, including Subprime deals, and we know how that worked out. CMBS actually has mechanisms in place, which have not worked perfectly as competition caused everyone’s mouth to get frothy, but the fact that the first-loss buyer can kick out loans is pretty powerful. Given there is a horrific catastrophe upon us, and CRE is going to see enormous losses on big name properties, but the residual interest argument doesn’t do anything to address the issue.