Many of the concerns that rippled through the CREFC Miami conference this week were directed at the US CMBS market. Delegates asked tough questions about the quality of loans, underwriting and leverage levels.
The Canadian CMBS panel this morning at the Fountainbleau Miami Beach offered a striking contrast, with a range of top Canadian lending executives outlining the major differences that make the comparatively tiny ($4.8bn of issuance at its 2006 peak) Canadian CMBS market less volatile than the US.
“The real difference is that we don’t underwrite CMBS loans any differently from the other platforms,” one panelist said. “The credit metrics are essentially the same.”
Delegates spoke of more conservative underwriting and lending practices in the Canadian CMBS market; “more risk takers in the US” on the borrower side; and a startling contrast between the number of Interest-only loans.
On the latter point, a slide displayed during the panel showed that the portion of US CMBS loans that are interest only is now approaching 70%, while in Canada this practice is nonexistent.
Canadian CMBS does carry longer terms (5-10 years) than balance sheet loans, which was cited as a reason for its resurgence and anticipated issuance this year of perhaps $2bn. It is finding its footing after becoming virtually nonexistent between mid-2007 and mid-2012.
“As a mortgage lender we like to offer the full suite of terms available in marketplace,” one panelist said. “Between 2010 to 2014 there was a gap in five to 10 year terms… that’s one of the main reasons we came back in.”
But, he added, echoing other panelists, “Our underwriting approach is exactly the same… on a one-year balance sheet loan or 10-year CMBS.” The loan-to-values on those loans are generally between 60 and 70%, with debt-service coverage between 1.4 to 1.5, he said.
Other players who disappeared during the recession have reemerged. Last month, for example, First National Financial Corporation, Canada’s largest non-bank originator and underwriter of mortgages, returned to the CMBS market, contributing $105m to a $283.7m pool of 10-year loans.
“Our decision to again contribute commercial mortgages to CMBS pools was driven by resurgent investor demand which had been dormant for several years following the global financial crisis,” Moray Tawse, executive vice president of First National said at the time.
Still, one can count the number of originators on one hand, but responding to a query from Real Estate Capital regarding issuance predictions for 2015, panelists agreed there would likely be about eight originators accounting for roughly $2bn in issuance.
Of the more than $25bn of Canadian CMBS issued since 1998, some estimates put losses at less than .1%. Again panelists suggested that was due to prudent borrower behavior and generally conservative underwriting practices.