Interesting of note for us at the Insider is that the mood seems to support lending in the rust belt states like Ohio on just stabilized deals. Well, we can definitely attest to that. Separately, retail seems to be leading the pack on property type, but we would expect to see a big swing towards office and industrial this year. This is probably particularly true in secondary markets where STNL and grocery-anchored retail have been the most sought after assets in the last couple years. But enough of our commentary - on to the experts.
Several of the Debt & Equity Finance team members attended the semi-annual CRE Finance Council conference. I thought I would pass along the feedback received on the state of the credit markets, especially the CMBS/conduit market which has been making a comeback.
General CREFC Feedback
- Mood of the conference was pretty optimistic as there is A LOT of liquidity in the CRE space. Not enough product to go around to satisfy all the piggies at the trough.
- Recent blow out of spreads put a damper on some of the mood as there is very little risk tolerance for losing money as some of these institutions get back into this business.
- All the regulatory uncertainty is definitely having an impact on the industry. Nobody knows for sure what the rules of the road will be. Eg; risk retention, capital allocations in general, B Buyers not controlling the special servicer, ability to monetize the IO strip, requirement of B Buyers to hold their investments for 5 plus years, etc. Stay tuned.
- Depending on how the regulatory framework evolves, we will have better clarity on whether the non-bank owned Conduits can thrive. Most think the big commercial and I-Banks will be the major players when the dust settles, but this is not a certainty.
- 2011 issuance levels will probably be in the $40 to 50 B range. Very few are predicting more will get done this year.
- Not enough B Buyers in market now. Only 5 or so real buyers per some experts. Consensus is that buyers will emerge once the rules are set and yields are high enough.
Product/What kind of deals are Conduits winning?
- Life Cos and GSEs winning the better product at reasonable leverage
- Conduits winning the higher LTV loans
- Go to Conduits for cash out refis
- They will go to secondary and tertiary markets ( $85M office bldg loan in Tulsa). Leverage goes down and structure goes up as the markets get smaller.
- Will lend in rust belt states of MI, IN and OH on stabilized deals
- Issuance YTD in 2011 heavily weighted to retail – approx 40%
- Conduits tough on acquisitions. Too much interest rate and execution certainty risk.
- Winning proceeds driven refisComparing CMBS 2.0 Underwriting to version 1.0
- Similar to 1.0 back in 2003. Nothing crazy. More thoughtful, visiting the real estate and understanding the market and the deal
- Can only get basic structural constructs waived on very low LTV deals
- No benefit for short amortization structures. In fact it may cut proceeds due to higher constant and lower cash flows
- All underwriting to debt yields in 8 to 12% range depending on product, market, LTV, etc. Lowest for MF deals.
- Can get 75% LTV on most product if cash flow is there
- Some quoting 80%. Can get higher in capital stack by Conduit making a high leverage loan and securitizing the Sr Loan and stripping off a Mezz piece
- All underwriting income in place. Very little creativity.CMBS Process
- Not much fun. Expensive and cumbersome. Don’t expect your client to pat you on the back at closing.
- Slower, more thorough, and more reliable
- Better at setting expectations at the outset
- Real issues with spread volatility and holding spread and then proceeds
- Some Conduits marketing an ERL execution, but latest language is full of outs for the Lender. ERL Agreement completely one-sided. Be very careful here.CMBS Legal Structure/Loan Docs
- Lock box required and can be an issue
- Legal fees get high in a hurry. Min of $25,000
- Independent Directors required: one on loans less than $20M and two on bigger deals
- Tough but fair. More absolutes and fewer trade-offs
- Carve-outs are a big issue. Some reaching for more backdoors to recourse. Need very close attention and negotiation, if possible.
- Not much room for negotiation of loan docs.
- Non-consolidation opinions required.