Will the CMBS Comeback Be Derailed — Again?

There is some confidence now that a sudden evaporation of conduit financing is less likely this time around because the economic recovery appears to have legs.

Could the conduit financing recovery reverse course overnight? Not likely, according to some experts, who believe a sudden evaporation of conduit financing is less likely this time around because the economic recovery appears to have legs.

Make no mistake, spreads for conduit loans can spike, as has been demonstrated in recent history. “We have seen disruptions before. There were a few instances in the last years. Spreads can increase suddenly, and CMBS financing can become non-competitive very quickly,” said Gary Tenzer of George Smith Partners.

A recent false start in the CMBS market occurred in 2011, when the recovering market was derailed by the European debt crisis and concerns about the U.S. economic recovery. “Because of the volatility, it was difficult to price deals on the front end,” explained Rusty Fleming, partner at Morris, Manning and Martin L.L.P. When the loans were taken to market, the conduits were not able to obtain the yields they anticipated. “That shut down the market.”

However, though a reversal of the current CMBS financing recovery is “always possible,” it is currently unlikely, according to Fleming. “We feel the U.S. and world economy are at different places now compared to two years ago.”

Tom Muller, co-chair of the real estate and land use practice group at Manatt, Phelps & Phillips L.L.P., agreed that the conduit market “would not be as easily derailed again.” He elaborated: “We expect the conduit market will be sustained for the next several years because the U.S. general economic recovery will be sustained for the next several years.”

Tenzer said borrowers can protect themselves against possible CMBS market disruption by locking in rates. “CMBS is a volatile market. Until you get to the point of locking the rate, you do not know you have a deal.”

CMBS financing allows for early rate locks of about 30 days in advance. But Tenzer also stressed that the borrower should not lock the rate until the due diligence, such as environmental reports, has been performed. Borrowers could lose their deposit if they lock the rate and decide not to complete the transaction.

 For more on the conduit market’s performance, see “Comeback Redux” in the May 2013 issue of CPE.