The Lost Year
Dec 1, 2008 12:00 PM, By Elaine Misonzhnik
Unfortunately, it appears that the era of securitized loans has come to a dead end — in October, CMBS issuance came to $0, after posting similar results for the previous three months, reports Commercial Mortgage Alert, an industry newsletter. By contrast, from July through October 2007, when the credit crunch was getting under way, the market still saw $55.2 billion in CMBS issuance. CMBS issuance might begin to climb up by the second quarter of 2009, according to Todd, but nobody has a clear idea by how much.
For now, securitized debt markets remain inaccessible. As of Nov. 5, spreads on 10-year triple-A-rated conduit loans stood at 600 basis points, according to Commercial Mortgage Alert, compared to this decade's low point of 24 basis points, reached in April of 2005 and then again in June of 2006. Historically, from 1997 through 2007, spreads on triple- A-rated CMBS loans stayed below 50 basis points. And in the wake of the government's announcement that TARP money won't be used to buy toxic commercial real estate backed assets, spreads on the CMBX-NA-AJ 5 index shot up to 1,156 basis points on Nov. 13, while spreads on the CMBX-NA-AA-5 index went up to 2,051 basis points.
In recent months, some observers have held out hope for the emergence of a new securitized debt vehicle — for example, covered bonds, which function in the same way as CMBS bonds, but remain on the issuer's balance sheet, minimizing the risk for investors. That's looking unlikely according to Gorczycki. “Something has to fill that void, but who knows what it is,” he says about the $34 billion in securitized loans that will need to be refinanced in 2009.
SOURING FAST: Recent CMBS loans are going bad at an alarming rate. Loans originated in 2003 and 2004 have done well, but losses on 2005 and 2006 loans are rising fast.
The best indication of where the real estate lending market is headed can be glimpsed in the behavior of Mark Finerman, former head of real estate finance operations at RBS Greenwich Capital, a Greenwich, Conn.-based fixed-income capital markets firm. Earlier this year, Finerman, along with two other structured finance experts, Perry Gershon and Chris McCormack, formed Loan Core, a company with $1.5 billion in commitments for opportunistic debt investments. Loan Core eventually plans to provide commercial real estate loans using a mechanism that will allow it to retain a portion of the loan on its books and sell off the senior portion in the securitized market. Given current conditions, however, Loan Core will likely focus on whole loans for the time being. Finerman did not return requests for comment.
Because banks have to hold real estate loans on their balance sheets, they will never be able to lend as much money as Wall Street players, or to offer such easy terms. In 2007, commercial/multifamily mortgage originations totalled almost $508 billion, according to the Mortgage Bankers Association (MBA), an industry trade group, with conduits accounting for $225 billion, or 44 percent, of that volume. In the first half of 2008, however, combined commercial mortgage originations from CMBS players and life insurance companies came to only $50 billion. What's more, the banks are facing pressure from the government to limit their exposure to real estate, which means their real estate allocations will likely be below average next year. Insurance companies are in a similar bind, according to Mulvee. Their real estate allocations are already too high because of falling stock prices and they are not currently raising mountains of extra cash through the issuance of new insurance policies.
As a result, “It's not going to be an easy recovery,” says Adam B. Weissburg, partner with the Los Angeles-based real estate law firm Cox Castle Nicholson LLP. “It's like a patient who's been in intensive care. We are starting to see signs that the patient is stabilizing, but things are still grave. I think next year is going to be all about stabilization.”
In better times, when DLC Management Corp. needed to secure a loan it would enter negotiations with a handful of lenders with whom it had long-standing relationships and pick and choose its way through the competing bids, says Daniel Taub, executive vice president and COO of the Tarrytown, N.Y.-based shopping center owner and manager.
Today, however, to secure refinancing for Tower Shopping Center, a Raleigh, N.C.-based 152,273-square-foot neighborhood shopping center that has a loan maturing in January 2009, the firm had to contact more than 100 potential lenders.
Those few lenders who continue to be active in the marketplace, including national players Bank of America and Wells Fargo and small community banks, ask for such tight underwriting criteria, only the most financially disciplined landlords appear to be able to secure loans.
Any borrower who wants to get new financing better be prepared to accept loan-to-value ratios of no more than 65 percent and debt-service-coverage ratios of 1.25 percent. Non-recourse debt has become a thing of the past, says Taub, putting tremendous pressure on smaller, privately held investors. In those rare instances where no recourse might be an option, borrowers have to accept interest rates in the 9 percent to 11 percent range, up from 6 percent to 7 percent a year or two ago.
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