New Signs of Life in the CMBS Markets

After ending the last few months of 2011 on a down note, it seems that CMBS is making a comeback in 2012. New data shows that the pace of new CMBS defaults are about to start slowing, and capital looks to begin flowing again soon.

After ending the last few months of 2011 on a down note, it seems that CMBS is making a comeback in the new year. New data from Fitch Ratings shows that the pace of new CMBS defaults are about to start slowing — reaching 14.5 percent by the end of the year — and survey results from the Urban Land Institute, in a poll of 38 leading real estate economists and analysts show that the CMBS market is poised to start opening the capital doors again soon.

“CMBS is the critical sector for run-of-the-mill properties,” Peter Linneman, principal & CEO with Linneman Associates, said. “It (went from) a small part 10 years ago, to being a huge part of the market for capital in 2007, before becoming nonexistent in 2009. The forecast is that it will rebound.”

But the CMBS market is certainly not without its ups and downs — and its inconsistencies. “It can rebound very rapidly and it can shut down equally rapidly,” Linneman said. “It was on pace for $50 billion (last year) and, after July, you saw nothing for the next three months.”

The cumulative CMBS default rate closed out last year at 12.7 percent, or $71.3 billion. Fitch expects that the rate of new defaults will continue to slow. New defaults finished 2011 38 percent lower — 950 loans totaling $13.7 billion — than levels seen in 2010, which had 1,477 loans totaling $22.1 billion. Fitch expects the trend to continue this year with general performance continuing to stabilize.

But, as always, it pays to be cautious. “There is enough vagary on the process that it’s an unknown,” Linneman said.

Trepp’s newest figures show those vagaries. While CMBS delinquencies reached their lowest totals in a year, the rate spiked in March by 0.3 percent. “We predicted late last year that the delinquency rate would rise largely on the impact of 2007 loans coming due, and today’s report underscores that forecast.  After the rate fell nicely in January and February, we were cautiously hopeful that we’d be wrong.  This month’s report shows that the market has a lot of wood to cut and that a rate north of 10% can’t be ruled out,” Manus Clancy, senior managing director at Trepp, said.

“There’s still a lot of restructuring going on,” Kenneth Rosen, chairman of Rosen Consulting Group, said, noting that the CMBS market is likely to continue seeing more investment. “Equity has been waiting.”

And data from the Urban Land Institute’s most recent survey backs Rosen’s claim. While total transaction volume is expected to increase from $250 billion in 2012 to $312 billion in 2013, the CMBS market specifically is projected to jump from $40 billion this year to $75 billion by 2014 — a considerable increase from the recession’s low point of $3 billion in 2009.