For years following the crash, the securities market participants shunned the CMBS market, but now it appears that a combination of a low level of defaults in recent years and attractive interest rates are once again piquing investors' interest. In turn, more issuers are jumping back into the game.
For large loans, CMBS is hugely advantageous because it is hard to get one bank or even a group of them to write big mortgages. The expected gains in the market would likely come on top of last year's near doubling of CMBS volume in the U.S., to $86 billion, from the 2012 level. That is close to where the market stood in 2004, when it was on the verge of the explosion that took it to its frothy pre-crash high of almost $230 billion.
There is more interest in large-loan and single-asset, single-borrower deals, which could lead to more issuance. Such issues are attractive to borrowers because they typically carry a lower interest rate, but they are also riskier for both buyers and sellers of the mortgage securities in times of volatile interest rates. Floating-rate CMBS loans typically allow borrowers to pay off the debt before maturity with minimal penalty and can be used in deals in which the borrower wants to reposition a real estate asset. Fixed-rate CMBS loans don't offer nearly the same leeway.
In another positive sign, a growing number of firms are stepping back into the market as issuers. A growing comfort level among investors with CMBS is also throwing the door open to a broad range of smaller borrowers, whose participation is bullish for expected volumes. The combination of many more lenders in the market plus the added frequency of CMBS pools and the ability for CMBS lenders to earn more profit in smaller loans has increased the flow of smaller deals.
16 June 2014