CRE N Illinois

The Alter Group's Matt Ward: The CMBS market is back

Matt Ward, a senior vice president with Chicago's The Alter Group, celebrates the return of the CMBS market, and highlights just how important this market is to commercial real estate.

[caption id="attachment_23391" align="alignleft" width="300" caption="Matt Ward"] Guest post by Matt Ward, senior vice president, The Alter Group

At its 2007 peak, the CMBS market reached $230 billion in sales and backed 40 percent of all commercial real estate lending. While we are a long way from that crest, CMBS has fought its way back.

After posting $48 billion in 2012, issuances could hit $80 billion in 2013 and $100 billion in 2014. Part of the reason is that there is a shortage of bonds in the market because so much of the 2007 stock matured last year. All of this is good news for the industry because the simple truth is that we can't function without CMBS.

The bond market remains the principal way that developers and owners convert temporary financing (often three-year construction loans) into permanent financing. In addition to office, sectors like retail and hotel use it as their primary source of debt.  Typically, this is accomplished with conduit loans, which are converted into securities and sold to investors.

In early 2012, some commercial real estate industry authorities feared that when existing commercial loans matured, they would not be able to refinance and the properties would revert to REO status for portfolio loans and special servicing for securitized debt. However, the Fed's announcement of low interest rates until 2015 meant that returns on T-bills narrowed to as little as 150 basis points, forcing the global investment community to look for yield elsewhere.

This was followed by the launch of QE4 in December, which releases $85 billion a month in investment money back into the economy. The surge of capital benefits real estate securities that offer investors relatively high yields (we’re seeing B-piece CMBS investors achieving 20 percent and higher yields) and relative safety (CMBS delinquencies – at just 9.03 percent in April – have hit their lowest levels in two years).

The new conduit

Borrowers considering CMBS loans will find available money at attractive rates, primarily because investors have achieved a comfort level because lenders have moderated leverage and increased transparency on conduits. As a point of comparison, while portfolio lenders will make non-recourse, loan-to-value loans of up to 65 percent, CMBS lenders will go as high as 75 percent.  Although the LTV is not at the 90 to 95 percent level that prevailed before the financial crisis, it is loosening the credit market and creating liquidity. Large-loan CMBS is also more competitive as compared to multi-borrower conduits.

The CMBS bump

The return of CMBS along with increased lending by regional and community banks means more transactional activity this year. According to ULI/Ernst & Young, CRE volume could top $310 billion in 2103.

The liquidity that CMBS brings means a broadening in the real estate market from a purely core institutional focus to more investment by private buyers and more transactions in secondary and tertiary markets.

Matt Ward is senior vice president of Chicago’s The Alter Group. He can be reached at 847-568-5922 or by e-mail at