Navigating the ‘New’ CMBS System
- Nov 26, 2019
Once considered an unlimited bucket of capital for borrowers, CMBS provided a relatively quick and easy financing alternative for capital requirements that weren’t being addressed by the other capital market systems.
Today, CMBS remains the most aggressive and cheapest capital in town, offering interest rates at historic lows. With the treasuries falling into the mid ones and with spreads in the mid- to high-100s, rates on CMBS loans are hovering in the high-2-to- low-3-percent range.
Life companies were generally the clear favorite when it came to price, especially on low-leveraged loan requests. However, with rates falling below 4 percent, life companies have put artificial floors on their rates due to concerns about achieving the yield requirements on their general account money as well as their investor managed accounts.
Conduit lenders are also beating out agencies on pricing, but for a different reason. Agency pricing has widened as both Freddie and Fannie are capped out from the volume originated earlier in the year.
Shrinking Pool of Conduit Lenders
Although conduits are now winning out on pricing, the CMBS machine is running at roughly 50 percent capacity when compared to the volumes achieved in the early 2000s, and there is simply not enough bandwidth to meet the demand.
Two years since the federal risk retention requirements went into effect mandating that lenders keep 5 percent of their loans on balance sheets for at least five years, the pool of conduit lenders executing CMBS loans has decreased by more than 50 percent—from 38 in 2015 to 16 currently. As a result, the pace and amount of securitized loans have dramatically changed with loan pools now ranging in size from $500 million to $1 billion.
Until we see an increase in capacity, it is important for borrowers to develop a relationship with these conduit lenders.
Understanding the likes and dislikes and the leverage tolerances of the various CMBS groups is vital to improving a borrower’s chances for success of getting a loan approved, and more importantly moved through the system. Providing your CMBS lender with a level of certainty they will be getting the business, can greatly enhance the chance for success.
Having a strong relationship with a CMBS lender does not guarantee quick execution of a loan request, but it can provide a leg up in the process.
Shlomi Ronen is managing principal & founder of Dekel Capital.