MAY ISSUE: True Recovery?

Is CMBS really back to stay?

Is CMBS Really Back to Stay?

By Keat Foong, Finance Editor

The CMBS market is back up and running, with total issuance on an upward trajectory for the past few years. For 2014, the sector is anticipating issuance to rise from $80 billion last year to as much as $110 billion, halfway to the $200 billion peak reached in 2007. But we have seen numerous false starts before, when CMBS financing recovered only to retreat amid capital markets turmoil or fallout from financing excesses. So how secure is the recovery in this financing sector?

Already, there are signs that lending standards are loosening around the edges. There are currently an estimated 37 conduit originators. Some observers say this constitutes a few too many shops to play in the market without undermining underwriting standards. Indeed, in December Fitch Rating cited “pressure on small and new CMBS originators to make loans and compete with established lenders.” These less established conduit lenders are forced to “make less desirable loans and reduce underwriting quality in recent deals,” said Fitch.

Several transactions on which the rating agency provided feedback included a higher percentage of loans from new originators. Fitch said “these loans may not raise a red flag when measured simply by DSC or LTV.” However, they were marked by weaker credits as a result of “locations, sponsors’ experience levels and histories (including financial stress and litigation), and esoteric or unusual property types.”

Read the full article in the May 2014 issue of CPE. Access is free!