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CRE Finance World, Winter 2013

CRE Finance Roundtable: Outlook for 2013 Brian P. Lancaster: It looks like we are going to end this year with about $47 billion Given Sam’s perspective that we are in an incredibly low-rate of new issuance — up about 45% from 2011. Projecting further environment which is driving down cap rates and boosting prices out, I think that we are ultimately going to reach a sustainable level with limited NOI growth, the risk of course is the downward of issuance at around $100 billion. I could see that happening as pressure on property valuations or the value of mezz that early as 2015. could ensue when cap rates go up. It’s important on how the securitizations are done, and how conservative structures are Brian P. Lancaster: to deal with that. What is driving the growth rate? Are we seeing significant investor demand? Are we seeing new investors coming into the sector? Nelson Hioe: Old investors increasing allocations? If you are someone who thinks that Libor is going to be 5% two years from now, you should not be playing in any of this. There is David Nass: a natural weeding out process of who is even participating in this First and foremost, there is general recognition that CMBS is a space based on their macro views. It is a self-selected group of solid product. The market was possibly too large pre-crisis at $240 investors who have a particular view on rates and fundamentals billion, but generally speaking, post-crisis the product is recognized that allows them, as a gating issue, to be active. Within that, on a as one of the more successful structured products. The CMBS deal by deal basis, it’s important to understand what one is investing structure was sound even in the height of the crisis. Loans went in and make determinations about which transactions offer the into special servicing and special servicers either worked-out best risk-adjusted returns. those loans and returned them to the trust, or the special servicer sold the loans or properties. Generally speaking, when you look at Brian P. Lancaster: CMBS across other structured products, it is easy to understand Are the mezz loans backing the deals being done more in why the CMBS industry restarted and was one of the first to come collaboration, with say, higher LTV refinancing to help get them back in 2010. The structure worked even with material changes in done, or is it more for acquisition? property values and cash flows and during one of the most severe corrections in modern day history. Nelson Hioe: Even though we have had some volatile moments over the past I think Dave can weigh in as well, but I think it’s both. We are seeing couple years, we continue to see large financial institutions commit some mezz being made on loans in 2006–2007 vintage loans, capital to originate and securitize loans. The demand is there for a where values have declined somewhat and sponsors are unable number of reasons, starting with fundamentals. Underlying commercial to put in significant amounts of new equity. So they are basically real estate fundamentals have improved. There is enough liquidity trying to top it up in order to make a transaction happen. in the financial system to refinance many of the maturing loans. There is also a competitive mezz lending market that provides the David Nass: required gap financing allowing for the successful refinancings of I absolutely agree. Across the board, whether it is whole loan over-levered legacy CMBS loans. In 2012, CMBS investors and financing or mezz financing that’s getting done today; we saw a mezz lenders seemed to agree that there was good relative yield tremendous amount of refinancing in 2012. That said, in the fourth in our industry. quarter, we saw an increase in acquisition financing. This is another positive sign — an increase in transactional activity with more fresh Brian P. Lancaster: equity going into deals today. Francisco, would you agree as a buyer of CMBS? Do you still find the product attractive? Brian P. Lancaster: David, what is your outlook overall for the CMBS issuance, say Francisco Paez: conduit versus large loans, and floating rate versus fixed in 2013. Absolutely. From a relative-value standpoint, the proposition in CMBS continues to be attractive. Thinking about it in the context David Nass: of other structured products, the only other product that would be I am estimating $65 billion for 2013. Roughly 20-30% of that an adequate comparison to CMBS in terms of relative value would issuance will be single borrower and single asset securitizations. be CLOs. There are really not a lot of other alternatives that offer CRE Finance World Winter 2013 12


CRE Finance World, Winter 2013
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