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CRE Finance World, Summer 2014

A publication of Summer issue 2014 sponsored by CRE Finance World Summer 2014 49 Governors on the CMBS Market Recovery The largest governor on the CMBS recovery, in our view, is the approximately $360 billion of CMBS mortgage loans that contractually mature over the next four years and which represent nearly two-thirds of the entire CMBS market. The majority of these loans were underwritten at the top of the market in 2006 and 2007 when underwriting standards were at their most aggressive levels. By way of example, the Moody’s LTV reached as high as 118% for the 2007 vintage. Chart 4 U.S. CMBS Maturities ($ billions) Source: Barclays Research Due to adverse selection, where typically the better loans repay and the worse loans remain in the trust, loss severities for these maturing loans are poised to exceed historical averages of 42%. Chart 5 Selected Historical Loss Severity by Property Type Sources: Moody’s Investor Services, Trepp The uncertainty surrounding the ultimate ownership, loss experience and resolution of these maturing loans is weighing down the CMBS recovery and, in part, preventing the CMBS market from expanding beyond its current size of approximately $570 billion. The second largest challenge facing the CMBS market is its relatively small size as compared to the corporate and High Yield markets. As noted below, the corporate and High Yield markets are roughly 7x and 2x as large as the CMBS market and have daily trading volumes of approximately 13x and 6x the CMBS market, respectively. Chart 6 The CMBS, High Yield & Investment Grade Corporate Debt Universe Sources: Barclays Research, FINRA In addition to the pending maturities and its comparatively small market, CMBS research, transparency and reporting, while continually improving, remain imperfect. As such, the CMBS market can be difficult for new entrants to effectively break into, particularly in the “legacy” market where information across transactions can be very limited and often stale. Further, the CMBS market remains a “dealer-to-dealer” market with limited trading data/visibility. Until the CMBS market can grow in size to closer to $1 trillion, it will be difficult to support the kind of robust real time reporting, trading and transparency that exists in the corporate market. The Case for Commercial Real Estate Debt Now


CRE Finance World, Summer 2014
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