Panel Sees Investment Opportunities in CMBS

A panel of CMBS investors convened by the Commercial Mortgage Securities Association–CMSA–Tuesday in New York said investment opportunities still exist in commercial mortgage-backed securities due to positive sector fundamentals. It concluded that there is a great difference between the commercial and single-family residential sectors, which continues to be rocked by the subprime meltdown. Indeed, widening spreads on CMBS has provided a major investment opportunity, said Kent Born, senior managing director of PPM America. PPM America has been a big buyer of Super Senior AAA bonds, particularly in the last half of 2007 and into this year, and the widening spreads on these products has created an attractive investment opportunity, Born said. Born echoed other panelists, who agreed that commercial real estate is still benefiting from a positive supply-demand equation. Indeed, Lee Cotton (pictured), vice president of Centerline, and president of CMSA, noted that commercial real estate construction has declined, which is in sharp contrast to the late 1980’s and early 90’s, when overbuilding led to more vacancy in existing properties. But, as Edward L. Shugrue, senior managing director of Guggenheim Structured Real State, noted, CMBS issuance has, to date, been a fraction of the 2007 level. He said a lack of liquidity, rather than economic concerns, is the main culprit. “Liquidity is really zero,” Shugrue said. Cotton said some of commercial real estate’s past problems were generated by a lack of transparency, and borrowers today are more sophisticated, from the institutional level all the way to a family that owns some multi-family properties. And even if a commercial property does go into default, the panel agreed that it usually is generating some level of cash flow, in contrast to a single-family home with a mortgage that goes bad.