What I Learned at the Commercial Real Estate Finance Council Conference, January 9–11, 2012

by Stephen R. Blank

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January 17, 2012

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  • Since reaching a trough during the Great Recession, issuance of U.S. commercial mortgage–backed securities (CMBS) has slowly started recovering . . . very slowly
  • Factoid: According to Commercial Mortgage Alert , first-quarter 2012 CMBS issuance is projected to total approximately $7.3 billion, with cumulative issuance over the past four years (2008–2011) equal to approximately $59 billion—the amount issued in 1999! Like I said, it is recovering slowly.
  • In regard to commercial real estate market fundamentals and future CMBS issuance, panelists seemed to have a limitless series of concerns including: the U.S. economy and “uncivilized” political environment; the “glacial” improvement in U.S. real estate fundamentals; the European economy (referred to as the “elephant in the room”); the need to both improve investor confidence in the “product” and increase disclosure and transparency; the “state” of the rating agencies; the need to resolve the myriad of “open” Dodd-Frank regulatory issues; the volatility present in the capital markets; and the large amount of five-year, floating-interest-rate CMBS maturing this year.
  • Panelists estimated that between 20 and 35 percent of CMBS loans originated in 2007 and maturing this year are projected to be refinanced with the balance facing significant equity shortfalls (of 25 percent to as much as 40 percent) due to inadequate net operating income to support refinancing; a likely result is a combination of forced asset sales by lenders and borrowers as well as a continuation of lenders’ willingness to modify some portion of maturing loans and extend their maturities.
  • Projections of U.S. CMBS issuance for 2012 ranged from $25 billion to $40 billion, with issuance continuing to be negatively affected by the inability of issuers to effectively hedge warehouse positions.
Urban Land Institute

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Comments (1)

Mr. Jeffrey Pirhalla - Charlotte, NC wrote - on January 17, 2012 at 10:24 PM

Stephen, Great take-aways. I would not be surprised if the percentage of 2007 vintage CMBS loans that face a serious equity gap (and imminent default) approaches 40% across all asset classes. Not only has NOI fallen significantly in many markets as compared to '07, but also depressed occupancies, tenant concessions, higher operating costs, accrued deferred maintenance, higher cap rates, higher capital costs, and the lack of available debt will continue to contribute to the problem. I tend to think we will see more special servicers restructuring loans into multiple capital stacks (A/B/C/Mezz notes) with required borrower-funded principal reductions. I suspect DPO's will emerge as a primary vehicle in 2012, and under-performing assets and value-add plays (notes & assets) will reap substantial rewards. No doubt, we will all be busy this year. Cheers.

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