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CMBS ACTIVITY HIT FRENZIED PACE DURING SUMMER MONTHS

By Donna Mitchell

Summertime used to be such a slow period in the commercial-mortgage-backed securities market that many professionals took extended vacations. But this year capital-seeking borrowers and the capital-laden investors who oblige them interrupted that tradition. From June through August, the market posted a staggering $48.8 billion in new deals, nearly twice the $26.2 billion of last year’s comparable period, according to Commercial Real Estate Direct, a Newtown, Pa.-based news and database service.

“The volume in June year-to-date is 50 percent ahead of last year’s year-to-date, which was a record,” said John B. Levy, president of Richmond, Va.-based John B. Levy & Co.

From January to August the CMBS market turned out a sizzling $98.5 billion in deals, up 63 percent from the $60.5 billion of the same period last year, says Commercial Real Estate Direct.

The flow of CMBS deals has been particularly strong from April through August, says Michael Cain, a senior vice president and West Coast regional manager at CW Capital, Needham, Mass. And the deals have gotten larger, too. In 2003 the average CMBS deal was about $1.2 billion. That increased to about $1.4 billion last year and to slightly more than $2 billion so far this year, according to Wachovia Securities. Experts have mixed opinions about the trend. Some say developers will continue to enjoy a continued flow of liquidity. This is because CMBS investors love the stability that shopping center mortgages offer — long-term lease payments from national tenants with strong corporate credit. Regional retailers with significant market share also find favor with the market, even if their corporate credit is not investment grade and despite not having stores all over the U.S.

But less bullish observers see inevitable changes ahead for the economy that will ultimately make financing more expensive. Sellers are watching to see whether Federal Reserve Board Chairman Alan Greenspan continues raising interest rates, says Jim Koury, a senior vice president at Spaulding & Slye Colliers, a Boston-based real estate brokerage. They are also monitoring demand for the 10-year Treasury. This is prompting some sellers to move fast so that they can benefit while the affordable financing holds out. Underscoring those efforts, more landlords are putting properties up for sale without listing a price to see what bids come back, says Koury.

The summer has also seen a shift in lender and investor attitudes about underwriting. Underwriting standards slipped noticeably in the early part of the year. “CMBS investors took notice as investment-grade spreads widened, and there was less appetite from CMBS buyers for less-disciplined deals,” said Cain.

Commercial lenders, for their part, are looking more closely at loan applications. According to a Fed survey of loan officers done in July, only 13 percent of domestic banks reported easing lending standards for commercial real estate loans, down by about half from the number that reported doing so in April.

Some investors complained about the high loan-to-value ratios of the underlying loans in several CMBS deals. The rising number of interest-only loans is worrisome too, says David Koletic, director of real estate capital markets at Charlotte, N.C.-based Wachovia Securities. For about six months now, Koletic says, interest-only loans have made up an increasing share of the loans in CMBS deals. Often, an interest-only loan is structured so that the borrower is only paying interest for the first couple of years of the loan, after which the borrower begins to make principal and interest payments for the rest of the loan term.

But concerns over underwriting will unlikely affect the CMBS deal volume, say others. “Investors are always looking for something to talk about, but at the end of the day, the buy side of the CMBS world is buying the paper,” said a source who didn’t want to be identified. So executives might want to think twice before booking a summer vacation next year.