CREFW-Summer2015

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CRE Finance World Summer 2015
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or this article, we examine the CMBS 2.0 “State of the
Market” and have brought together industry leaders who
not only shape and define the CMBS market but who
also represent different segments including investment
(from AAA to Mezzanine), origination, distribution, trading
and special servicing. With 2015 CMBS origination already 33%
ahead of 2014 levels, delinquencies reaching new lows and loans
in special servicing at approximately half of peak levels, we wanted
to explore where the current opportunities (and risks) are, where
we are in the cycle, current challenges, and what “keeps us up at
night.” Our participants included:
Matt Borstein — Head of Commercial Real Estate Lending,
Deutsche Bank
George Carleton — Executive Managing Director, C-III
Capital Partners
Michael Nash — Senior Managing Director, Blackstone Real
Estate Debt Strategies
Rich Sigg — Head of CMBS trading, Bank of America Merrill Lynch
The consensus observations were that real estate fundamentals
are strong and continue to improve, low interest rates will be here
for some time, valuations will continue to climb and that transactions
are generally more conservative and better structured than 2006/7,
but that credit standards continue to gradually loosen. Global factors,
including interest rates, the price of oil, currency fluctuations, and
the emergence of the sovereign buyer are creating new challenges
and paradigms, and all agreed that CMBS (and related commercial
real estate debt) continues to provide compelling values “across the
stack” if you know where to look and are able to maintain discipline.
Where are we in the Cycle?
All of our participants agreed that we are still early (fifth or
sixth inning) in the cycle for real estate fundamentals and that
as the U.S. economy continues to improve/expand, so too will
property occupancies, rent rolls and cash flows. While valuations
are currently on the high end due to a combination of low interest
rates and an influx of foreign capital, leverage levels are comparatively
modest, particularly as compared to the 2006/7 vintages as
illustrated by the valuations and leverage points for the ESA
Portfolio depicted below.
Exhibit 1
ESA Comparative Capital Structures 2015 vs 2007
Sources: Various Offering Circulars, Public Information & Talmage Research
The Extended Stay America Hotel Portfolio is used for this illustrative example.
Additionally, new, larger “permanent capital” buyers with longer
holding horizons have replaced the heavily leveraged buyer of the
pre-financial crisis days. “You can’t compare today’s long-term,
highly capitalized, and generally conservatively leveraged investors
with the individual pre-financial crisis buyer of 2007 who was
beholden to the capital markets at a 6x leverage ratio. While prices
are higher, the structures are fundamentally more stable,” noted
Michael Nash from Blackstone.
It was also observed that we are now living in a global property
market where prices in New York are not only being compared to
other U.S. gateway cities but also to their international counterparts
such as London, Hong Kong and Tokyo. On this new metric, which
may take a certain amount of acclimation, the consensus was
that the U.S. remains fundamentally cheap — though “rich” to
historical levels.
Exhibit 2
Global Class A CBD Office Rental Rates and Valuations
Source: World Property Journal, CBRE
F
Ed Shugrue III
CEO
Talmage LLC