After a dismal — if not abysmal — first quarter, where CMBS all but ground to a halt, the industry has some momentum as spreads have tightened and deal flow begins to pick up, delegates heard at the kickoff of the CRE Finance Council’s annual conference today in Manhattan.
But no one is jumping with excitement. The current pace of issuance is about 50 percent below where the CMBS market stood last year. And, annualized, that works out to just about $58 billion for the year, noted one speaker representing a major US bank.
Delegates are aware that the glory days of CMBS are gone. The whopping $228 billion done in 2007 is a thing of the past and likely never to be seen again. There’s a new bull market in CMBS, the banker declared, and that bull market in the foreseeable future will not exceed $125 billion per year.
But, per usual, there are winners and losers this year. The market share lost by CMBS has gone mostly to the banks, who, as Real Estate Capital noted in its weekly commentary last week, have only increased their footprint — so much so that another banker at the event noted that the FED has “come out to us and said, ‘don’t put any more real estate exposure on your portfolios.”
This year could mark the first year that insurance company lending volume exceeds that of CMBS, noted another conference delegate.
Though the CMBS market has suffered, the general consensus appeared to be that the broader CRE markets remain strong — not two years ago strong, but still fairly liquid and with underwriting standards that are much more conservative than the dangerous peaks seen last cycle.
Ironically, the often feared risk retention rules were cited several times as a reason for more conservative underwriting, and as people start to make sense of the rules they are being viewed more favorably — for the market as a whole, at least.
A majority of attendees were in agreement that underwriting has improved, while others said they were on par with last year. But when one speaker asked the room who thought underwriting was worse this year compared to last year, not one person raised a hand.
Pricing across asset classes will only be up a few digits this year, according to some estimates, compared to the 17 percent boost seen last year, which plainly points to the peak of this cycle having passed.
Another major concern continues to be the coming Wall of Maturities, which has been mostly brushed off in recent months as refinance-able after initial panic rippled through the market beginning early last year.
But many challenges lie ahead. By year end about $350 billion in loans will have come due this year; in 2017 the number rises to $400 billion. And the more difficult loans to work out are soon to make their grand appearance.
“It will be interesting to see during the latter part of this year how much of that will have trouble being refinanced, and I think the answer to that is ‘a lot,’ but nobody likes to admit it,” an executive with a leading financial intermediary said at the event.