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CRE Finance World Summer 2015
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How is Today Different from 2006/2007?
The consensus was that we are in a totally different, more rational
and more stable market today than in 2006/7. Our panelists
cited several reasons, all of which serve to protect the stability
of today’s market:
1. More Dealer Discipline. CMBS conduit transactions are smaller
(see below) and are issued more rapidly since dealers are less
willing to retain/warehouse inventory.
2. More Control from CMBS Buyers. Today’s ‘AAA’ and ‘AA’ buyers
are able to exert more influence on CMBS credit quality —
rewarding stronger transactions and punishing weaker ones —
resulting in higher and more consistent asset quality.
3. Less Leveraged Buyers. Particularly in larger loans, gone are
the days of unlimited leverage.
4. Better Ratings. New rating agencies have emerged post financial
crisis and have created a healthier and more competitive ratings
market benefitting investors.
The CMBS spreads, issuance levels, average transaction sizes and
debt service coverage levels of today are presented as compared
to 2007 levels.
Exhibit 3
CMBS Metrics — 2015 vs 2007 ($ Billions)
Source: CMA, Talmage Research
“From the issuer’s perspective, all of us have several constraints
(regulatory, balance sheet, risk management, etc.) that are forcing
us to be very careful on asset selection and to be disciplined about
securitizing, or otherwise disposing of inventory, in a timely fashion —
this is healthy for the markets,” commented Rich Sigg from Bank
of America Merrill Lynch. Indeed, others agreed that dealers
have been very mindful of inventory levels and have been better
at partnering with buy-side investors as opposed to being an
outright competitor.
Rates – How low can you go?
As noted below, global interest rates are at historically low levels,
and in the case of Switzerland, negative levels. Given the large
scale and liquidity of the U.S. investment market, the U.S. has
attracted unprecedented amounts of foreign capital which has
fundamentally altered traditional equity valuation metrics. While
our participants agreed that the “V” in loan-to-value was reaching
record territory for Class “A” properties in gateway cities, all agreed
that those investments were supported by substantial equity
contributions and comparatively modest leverage ratios.
Exhibit 4
Ten-Year Sovereign Treasury Yields (April 2015)
Source: Bloomberg
Low interest rates, it was felt, have also acted as a governor to
the recovery of CMBS spreads which appear to be “range bound”
at swaps+80, as compared to swaps+30 pre-crisis, as CMBS
investors struggle with minimum “total return” thresholds. Despite
outsized CMBS spreads (as compared to pre-crisis spreads),
everyone agreed that given the combination of low interest rates,
easy monetary policy and investor demand for yield product, the
current environment represents an outstanding time to finance
real property.
Further, despite a healthy and recovering U.S. economy, coupled
with clear pronouncements from the Federal Reserve that easy
monetary policy would be ending, our panel felt strongly that
foreign capital would keep U.S. rates range bound at current
levels for the foreseeable future, other things being equal.
A “Three Tier” Market?
Despite the rising tide that lifted all boats equally pre-financial
crisis, our participants felt that the commercial real estate market
in 2015 has evolved and been refined into a three-tier market of
clear winners, losers, and the overlooked assets stuck in the middle.
CMBS 2.0 — State of the Market 2015