Surge in CMBS Volume Prompts New Ventures, Raises Concerns









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By Mark Heschmeyer  September 17, 2014

Cushman & Wakefield, PREI and Macquarie All Expanding CMBS Practices Ahead of Coming Wave of Debt Maturities

The resurgent CMBS market is enjoying its strongest month in seven years with about $15 billion of new mortgage-backed offerings being sold. The return of the CRE financing conduit has not gone unnoticed by investors, and firms such as Cushman & Wakefield and Principal Real Estate Investors expanding their CMBS services.

When September ends, CMBS issuance is projected to be up 20% year-over-year, according to Morgan Stanley Research, with a total of 21 separate CMBS deals totaling over $15 billion expected to price this month. This is by far the most active month since the end of the global financial crisis and compares to pre-crisis volumes.

Should all these deals price as expected, issuance volumes through the first three quarters of 2014 would exceed $67 billion, Morgan Stanley notes.

At the same time, the rebound in origination volumes has prompted some concerns over loosening underwriting standards among CMBS originators to win market share, coupled with declining insurance companies demand for loans as rates fell.

While acknowledging that underwriting standards are loosening, analysts at the investment bank noted they still appear to be more conservative than those underwritten in 2007, and also noted the expansion beyond core primary markets.

“The percent of CMBS loans secured by properties outside the top 25 MSAs is increasing to nearly 50% (compared to less than 35% prior to the global financial crisis),” Morgan Stanley researchers noted in their Global Securitized Products Outlook: Fall 2014, held this week. “In 2013, CMBS market share was 24% overall, consisting of 20% for primary markets, 25% for secondary markets and 35% for tertiary markets. For issuance to increase to above $100 billion in the coming years, CMBS originators would need to have approximately 30% market share driven primarily by secondary and tertiary markets.”

The greater issuance volume is coming at a key time given the forthcoming wall of CRE debt maturities.

The CMBS market has only surpassed the $100 billion annual issuance level three times: in 2005, 2006 and 2007. Because of the record volume in those years, an unusually heavy supply of debt maturities will hit in the coming three years, which may lead to a shortfall if demand among investors proves insufficient to handle the volume, according to research done by Peter Linneman, NAI Global chief economist.

Even if issuance hits $120 billion in 2015, 2016 and 2017, there will be a shortfall of roughly $240 billion in those three years, according to Linneman.

Signaling a strong vote of confidence in the resurgence of CMBS activity, Cushman & Wakefield has added a capital markets and commercial real estate veteran to its leadership roster to expand its capital markets platform. Bob Kline of RW Kline Cos. joined the firm this week as senior managing director of the Equity, Debt and Structured Finance Group.

Kline was previously CEO of his own CMBS debt restructuring firm and the leader of the equity/debt advisory team at RW Kline Capital LLC.

At Cushman & Wakefield, Kline will spearhead a specialized national CMBS advisory practice focused on CMBS debt maturities, assumptions, restructurings and rescue capital, creating what he said will be the largest CMBS debt restructuring practice in North America.

As CEO of RW Kline Cos., Kline facilitated more than 600 note sales, acquisitions and more than $8.7 billion in restructurings.

Also in the past week, Principal Real Estate Investors, the real estate group of Principal Global Investors, and Macquarie Group, announced they are creating a lending platform focused on originating and securitizing commercial mortgages called Principal Commercial Capital.

Principal is already actively involved in CMBS purchasing and commercial mortgage servicing. The major investor also has a lengthy track record as a CMBS loan originator and seller. The firm has contributed almost 2,000 loans totaling more than $16 billion to more than 50 securitizations.

The new venture will enable Principal Real Estate Investors to offer a wider menu of options for borrowers.

Principal Real Estate Investors and Macquarie will jointly manage the nationwide lending platform. Principal will source, underwrite, close and service loans. Macquarie will provide funding and capital markets expertise.

Macquarie has recently hired a team of CMBS veterans, led by Timothy Gallagher, to expand its presence in the U.S. commercial real estate market.

“There will be a substantial volume of commercial mortgage loans maturing over the next few years. That provides Macquarie with a sound opportunity to establish a CMBS debt platform in the U.S.,” Gallagher said.

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