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CRE Finance World, Winter 2012

Editor’s Page Letter from the Editor-in-Chief Brian P. Lancaster Managing Director and Head of MBS, CMBS and ABS Strategies Royal Bank of Scotland W somewhat optimistic but guardedly so. True 2011 was but we can continue to build and improve upon the architectureThe second purpose is more pedestrian and guided by the oldNiebuhr prayer “Grant us the serenity to accept the things wecannot change, the courage to change the things we can, andthe wisdom to know the difference.” We cannot change Europe,the ratings of US Treasurys or the trajectory of the US economy,elcome to the January 2012 conference issue of CREFinance World. One year after the optimism of lastyear’s conference, the commercial real estate financemarket finds itself in a more sobering position, stilla tremendous year of opportunity for many balance sheet lenders, such as insurance companies, who did record commercial real of commercial real estate finance. To that end we include several estate lending. Commercial real estate bank charge offs declined articles on special servicing since it impacts the bulk of the CMBS and CMBS delinquencies and defaults stabilized. Nearly $30 market. On p. 29, Darrell Wheeler examines the potential conflict billion of CMBS deals were consummated or almost three times of interest among servicers and the exercising of the fair value as much as in the previous year. Indeed, by the fourth quarter, purchase option followed by Brian Olasov discussing on p. 35 the US economic data showed signs of improving, lending a tone of disconnect between servicer appraisals and actual liquidation values. cautious optimism at year end. One of the biggest challenges all CMBS conduits face is how to hedge the collateral of new issue CMBS 2.0. TRXII A Primer: Yet amidst the progress, the country and the markets were faced Structure, Cashflow and Breakeven Analysis walks both the conduit with tremendous volatility from a variety of sources which continue originator and investor thru this new product and the opportunities to buffet the markets. Starting in March with the Arab Spring and it offers. If successful in 2012, this product could serve as a significant tragic Japanese tsunami, economic growth in the US slowed and catalyst for the growth of CMBS issuance. P.49 focuses on hotels legacy CMBS began to trade more erratically. The ongoing political which increasingly make up a significant part of CMBS issuance. tug of war between Germany and the rest of Europe as to how Finally, in a new back section, we include all of the Forum updates to deal with AAA sovereign debt that might no longer be AAA, to let our readership know what all the various CREFC forums are carried eerie echoes of the subprime crisis in the US just a few doing to reshape commercial real estate finance in the US. years earlier, except that the scale of the problem is much greater and European fiscal and monetary policy tools far more feeble. We hope you enjoy this issue and look forward to your feedback. I The resulting volatility in the CMBS markets turned a number of also wish to extend a thank you to our editorial board for reviewing investors away from the sector generating thinner and even more all of the articles in this issue and extend a big welcome to my two volatile markets which also increased the risk of creating CMBS, new co-editors, Paul Fiorilla and Julia Tcherkossova, without whom resulting in less issuance. The historic loss of the US’s pristine this issue would not have been possible. Oh and did you notice the AAA rating and the on again, off again ratings change of heart on cover? Do you think he wipes out or rides smoothly back to the one prominent CMBS 2.0 deal added to the sense of uncertainty. beach? See you in Miami. And did I mention Dodd-Frank, the Volcker rule, Basel 2.5, Basel III, CRD2, CRD 3 and CRD 4, and Solvency 2? Thus as we enter 2012 this issue, one of our longest on record, has two purposes. The first, to help the reader gain some perspective Brian Lancaster on all that is going on and how this might affect the outlook for Editor-in-Chief 2012. To that end, our longest article is devoted to an interview CRE Finance World with nine seasoned professionals from all aspects of commercial real estate finance — banks, insurance company lenders, servicers, investors, economists and B-piece and mezzanine buyers — who opine on how, with all the uncertainty and volatility, they see 2012 playing out. A publication of Winter issue 2012 sponsored by CRE Finance World Winter 2012 3


CRE Finance World, Winter 2012
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