CMBS Loans Saturated Yet Strong, Financial Experts Say
|Though commercial mortgage-backed securities (CMBS) loans are still doing very well, some financial experts are concerned that there may be too many CMBS lenders in the market today.
National Real Estate Investor reports that the number of lenders who provide CMBS may lead to complications. It is estimated that there are 35 lenders or conduit lenders that provide CMBS loans, and given that the top five lenders — Deutsche Bank, J.P. Morgan, Wells Fargo, CCRE, and Bank of America — issue 50% of all CMBS loans, there is talk of oversaturation of the market.
“To say that there are too many conduit lenders today is an understatement,” said Bryan Gortikov, associate director at George Elkins Mortgage Banking Company in Los Angeles. He added that the large number has affected both prominent and smaller CMBS lenders. Smaller lenders are forced to offer better deals to borrowers, such as lower interest rates and better spreads, in order to compete with the more established firms. The established firms, in turn, have to change their terms in order to sway borrowers away from “cheaper” deals.
Regardless of the difficulties the CMBS market is facing, it is still doing phenomenally well with borrowers and lenders alike jumping at the opportunity. Over the next three years, roughly $300 billion of these loans will mature, which is 2.5 times larger the amount of maturity between 2012 and 2014. Many of these loans have a 10-year balloon plan, which is advantageous to borrowers.
Generally, the commercial real estate market is growing much faster than many other sectors of the economy.Newsweek reports that real estate has done much better than other economic sectors since the Great Recession due in part to the better yields commercial real estate loans provide than other investments such as bonds.
However, one problem with CMBS lending is that the volume of issuance has gone done. In 2007, for example, American CMBS issuance was $230 billion. Last year, the issuance was only worth $94 billion. One reason for this may be the increased number of lenders. The smaller lenders, especially given their lack of reputation and experience, have ultimately driven down the amount of CMBS issued. The bottom 20 CMBS lenders issued a mere 8% of CMBS loans last year.
Still, financial industry insiders remain confident that CMBS loans will continue to flourish as borrowers become more confident.
“I do think it’s a great time to be a borrower. There is a tremendous amount of liquidity out there,” said Gregory H. Nalbandian, senior vice president and managing director at NorthMarq Capital in Morristown, New Jersey. “It will be interesting to see with the increased competition, how far lenders will be willing to push the underwriting envelope.”