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CRE Finance World, Autumn 2013

More Money, Fewer Problems? U.S. CMBS Servicers Position for Continued Growth In Commercial Real Estate Lending ING Investment Management Real Estate Finance – Atlanta A publication of Autumn issue 2013 sponsored by CRE Finance World Autumn 2013 41 for second half 2013, but nonetheless, we believe fundamentals remain solid as interest rates remain near record lows. We also expect market volatility will keep new issuance from reaching the frothy peaks of 2004-2007. In our opinion, these are positive trends that should keep the U.S. CMBS delinquency rate and pace of transfers to special servicing on a decline through the end of 2013. B-piece buyers line up Three B-piece buyers, C-III Capital Partners, CWCapital, and LNR Partners, traditionally dominated the market and also served as special servicers for their transactions. Consequently, they maintain the majority market share (approximately 82%) for legacy CMBS transaction special servicing assignments, according to the Commercial Real Estate Direct. From 2010 to 2012, a similarly small pool of B-piece buyers dominated the CMBS market’s recovery. Originators and issuers have generally relied on the B-piece buyer’s active participation in order to successfully execute a CMBS transaction. As a result of the lower number of active bidders, these early “CMBS 2.0” transactions had credit characteristics and prices that were highly favorable to the B-piece buyers’ investment objectives. More recently, however, new issue B-pieces are selling for higher prices (lower yields), despite what we view as a decline in credit quality of recent CMBS transactions. The number of B-piece buyers grew tremendously in 2013 and is currently at approximately 15, helping to keep conditions ripe for new issuance, but also adding potential risk. Some observers have noted that B-piece buyers, given their opportunity to underwrite loans and the inherent credit risk of their position in the capital stack, serve as “governor” for the credit characteristics of U.S. CMBS transactions. While this could arguably be true once risk retention provisions are implemented, in our opinion, a large supply of B-piece buyers may make it more difficult to maintain underwriting standards and collateral quality in U.S. CMBS transactions. In our view, more buyers may translate into less market discipline, because issuers may have fewer concerns of potential “kick-outs” of troublesome loans. With only three B-piece buyers, originators had fewer options for loan sales and had to maintain credit and underwriting standards that would meet the requirements of at least one of the three. With an expanded pool of potential B-piece buyers, originators may have additional underwriting flexibility. We will continued to monitor how shifts in the number of B-piece buyers affects pricing and underwriting, particularly as new risk retention rules come into play. Recent Notable Mergers and Acquisitions LNR Property LLC In April 2013, Starwood Property Trust and an investment fund managed by Starwood Capital Group closed on the acquisition of LNR Property LLC. This transaction is noteworthy given the focus of the strategy. In addition to taking advantage of growth in special servicing fees and ancillary opportunities created by a distressed environment (see published March 9, 2012 on RatingsDirect), Starwood Property Trust also projects growth by originating loans. The Wall Street Journal notes, “Since the crisis, the firm has originated loans and taken part in new commercial mortgage debt, businesses cited as key attractions to Starwood Property in its acquisition.” This acquisition strategy presumes that the volume of distressed assets will continue to decrease. This also represents Full Service Real Estate Manager  Balance Sheet Origination  CMBS Origination  A/B Structures  Fitch Rated - Commercial Primary Servicer CPS2- - Commercial Special Servicer CSS3+ - Contacts Jason Tessler Head of Production 770-690-6707 Mike Cale East Coast 770-690-4788 Dan Siegenthaler West Coast 770-690-4652 INVESTMENT MANAGEMENT WWW.INGINVESTMENT.COM


CRE Finance World, Autumn 2013
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