Taking CMBS market share helps US banks to thrive

The rate of growth of top US debt advisers is tapering, but CBRE remains busy – especially working with banks, reports Justin Slaughter

CBRE Capital Markets is on what you could call a hot streak, having ranked as a top five debt broker in the US market for many years.

Brian Stoffers, global president of debt & structured finance at CBRE, has been with the company since 1981, so he’s seen his share of real estate cycles.

CBRE's Brian Stoffers
CBRE’s Brian Stoffers

A clear difference in this one is the heavier regulation than ever before, perhaps not without good reason. But despite regulators having told the banks “to take the foot of the pedal,” Stoffers tells Real Estate Capital that “the banks are the real winners in this market”.

CBRE has seen robust business with the banks particularly when it comes to bridge lending and short-term investment loans, which offer good risk-adjusted returns while avoiding the new capitalisation requirements regulators recently placed on construction loans.

Packages arranged by Stoffer’s debt and structured finance division in the last six months have ranged from a five-year $136.5 million loan from Wells Fargo on a 1.3 million sq ft office portfolio at the end of December to a $5 million short-term bridge loan from Atlantic Stewardship Bank on a 113,220 sq ft office property in New Jersey this June and a $38.9 million five-year bridge loan from a national bank on two senior living communities in Georgia this May.

A report CBRE released in June showed that bank lenders have also captured a significant market share from CMBS conduit lenders whose originations began to stall in the first quarter of this year. CMBS issuance dropped significantly in Q1 2016, totaling only $19 billion, which was down 29.5 percent from the year prior.

Meanwhile, banks accounted for 43 percent of non-agency CRE loan origination in Q1 2016, upping their market share from 28 percent in Q1 2015.

Business robust despite volatility

By dollar volume, CBRE ranked fourth among top US originators for third parties in 2015, trailing Eastdil Secured at the number one slot, HFF at number two, and Meridian Capital Group at three, according to yearly rankings from the Mortgage Bankers Association (MBA).

CBRE originated just under $33.7 billion across 1,754 transactions for third parties, the MBA data shows. While Stoffers says his division is “quite pleased with our activity levels,” he adds that “we’re not seeing the massive growth we saw immediately after the crisis”.

Though that growth rate is tapering, Stoffers still hopes to have done more deals by the end of December this year than the firm did last year. CBRE said it arranged $6.6 billion in mortgage loans during Q1 2016, but loan activity is typically stronger later in the year, particularly in the fourth quarter.

Broken down by lender, the CBRE-arranged deals from the first quarter include $2.9 billion from government agencies, $1.6 billion from banks, $1 billion from life companies, $440 million from CMBS, $200 million from a private investor, and $220 million from pension funds, REITS and credit companies.

Some of the largest loans CBRE has arranged in the last year and a half have been funded by banks.

One of these was a $2.3 billion portfolio sale of GE Capital loans in December. Deutsche Bank bought up $1.59 billion unpaid principal balance across 46 loans, the largest share of that portfolio sale, as GE exited the commercial lending business for good last year. “This was kind of the ‘wrap up’ of what they had on their books,” says Stoffers, recalling the GE deal.

CBRE also arranged a $34.5 million loan from USAA on the Provenza at Windhaven apartment community in Texas this July, while the team advised on a $250 million loan from JPMorgan on a boutique mixed-use building in Manhattan and a $120 million loan from HSBC on a pair of office buildings in Silicon Valley, California the month prior.

Underwriting still conservative

Something else that Stoffers observes this cycle is that across the board, the loan-to-values are lower compared with the last market peak. And there’s more debt coverage because the interest rates are lower – which means more cash flow to support the process.

“Lenders have remained quite conservative throughout this cycle,” says Stoffers. “We don’t really see the ‘over-the-skis’ aggressiveness today.”

That’s in line with the general consensus voiced at the CREFC conference in New York City this June, as Real Estate Capital reported. The real estate debt community there agreed that the broader CRE market’s underwriting standards were significantly more conservative than the perilous peaks of last cycle.

The CBRE report from June also shows that loan underwriting in Q1 2016 compared favorably with Q4 2015, as the percentage of loans carrying partial- or full-interest-only terms remained below the 60 percent mark for the second consecutive quarter.

Even CBRE has changed some of its structuring routines. In the last cycle, for instance, in some cases CBRE was underwriting loans based on pro-forma rental agreements, or future rents; but not this cycle, says Stoffers. Today, CBRE has switched to arranging loans based on actual rents or rents just one year out.

On top of the conservative underwriting, Stoffers maintains that property fundamentals are strong and supply and demand are in balance in the US CRE market. The vacancy rate in the multifamily space is less than 5 percent, while building of office and retail have leveled out, he says.

“We are late on in this cycle,” says Stoffers. “But, unlike in past cycles, we aren’t witnessing loose underwriting or an overabundance of supply.”

CBRE’s database, “which refreshes in real time with quotes to keep on top of current trends in a very inefficient market,” is what differentiates the firm in the competitive CRE broker business, according to Stoffers.

“That massive amount of information available in the CBRE network, pulled from the appraisals division and asset management business, is key to underwriting real estate loans, and optimising the capital structure,” he says.

Global expansion

But he also points to the team’s global footprint as something that sets his company apart, and his team is expanding that footprint abroad. On top of hiring two large-loan specialists from Deutsche Bank for the New York office, the team is expanding globally to meet their clients’ needs.

An office in Melbourne opened a year and a half ago. In Europe, the team has increased its number of staff: “We are strong in the Netherlands, growing in Spain and France, and looking to open up in Sweden and in the other Nordic countries too,” says Stoffers.

CBRE’s debt chief sees sees two potential effects of Brexit: a ‘flight to quality’ towards US assets or flight to bargains towards London.

“We’ve heard Asian, Middle Eastern, and European investors say they are probably going to focus on US gateway cities given the uncertainly now in the UK,” says Stoffers. But he also notes that sterling’s post-Brexit devaluation makes UK properties more affordable, and as a result, he’s hearing that private Asian and Middle Eastern investors are “circling London like hawks”.

“I don’t know if those looking for bargains there are going to find it just because the pound is so much cheaper,” admits Stoffers. “But I don’t think there are going to be any fire sales in London.”

Filling the construction lending gap

Despite the banks continuing to do robust business, they have been less active on riskier deals like construction loans.

Through Basel III, regulators created the High-Volatility Commercial Real Estate (HVCRE) category, under which many construction loans fall.

The HVCRE loans now receive a 150 percent risk weighting on a bank’s balance sheet versus the previous 100 percent, so banks with signi cant exposure to such loans are pivoting elsewhere like short- term permanent loans.

“We’re hearing this from the best borrowers, who have long standing relationships with banks; the banks
are telling them they can’t extend their construction loan platform,” says Stoffers.

But CBRE continues to do construction deals with life insurance companies and real estate debt funds.

“These two sources are able to continue construction lending due to a combo of less regulatory control and the fact that they are ush with cash,” says Stoffers.

And though CMBS lenders “were essentially out of the market at the beginning of the year,” Stoffers says conduit lenders are still major players for mega deals or very aggressive loans in the B note market or higher LTV loans, “though they’re more conservative than they were in 2007”.