CMBS sees increasing mezzanine focus

A mezzanine focus and a competing origination market is how market participants described the current US CMBS market compared to previous years, according to panellists at the CRE Finance Council's annual convention in New York.

As one panellist noted, the market has become divided into the "have's" and "have less". In the past, what was needed to get deals done was great credit, great leases and good real estate. But over time the market demanded just some of those qualities and eventually only one of those qualities to get a deal financed, he said.

CMBS deals are increasingly centred on appeasing mezzanine investors. "Now you have to place the mezzanine first in deals compared to years ago," said one conference panellist. "At least in 2006 and 2007, you didn't have to syndicate the mezz."

He is thankful, however, that there are a lot of funds out there looking to buy in this sector, since the market did not have this "pocket of money" in prior years. He recently did a deal where the mezzanine investor clearly enhanced the execution, he said.

But others remain concerned over the amount of mezz investors out there. One issue raised at the conference was the supply imbalance of money versus deals. It's not whether there is enough money to get the deals done, but that - if there is a flood of deals - will there be enough mezzanine investors, a real estate broker asked.

While CMBS issuance returned in dribbles last year with the assistance of the Fed's TALF programme, a fully-fledged market is still expected to be further out on the horizon. Hindering efforts is uncertainty over how much property values could still deteriorate. About US$1trn of the US$2.7trn commercial real estate debt outstanding is coming due over the next three years, according to data presented at the conference.

Despite the few CMBS deals already, the lack of issuance continues to be a far-reaching problem. "The real headwind is not that there is three or four bidders on a deal, it's just the lack of deal flow," another panellist at the conference remarked. Price discovery is a common theme seen currently among industry participants.

Securitisation, when it occurs, is viewed by a majority of the real estate participants in attendance at the conference as positive, as well as a good funding source for REITs, in particular. But one distressed asset investor noted that lately "capital markets got a little bit ahead of the fundamentals".

Aggregating enough loans in general for a pool is a challenge. Commercial mortgage lenders themselves are faced with a myriad amount of refinancings that have taken place. Other lenders such as life companies have become more comfortable with where they are in the lending cycle, panellists agreed.

But one market participant noted how much worse some commercial loans are compared to other more stable property loans. "You don't get out of a failed construction loan overnight," he said.

There are no easy answers for the current lending environment, a banker added. "We look at multiple strategies (in dealing with debt maturities)," he said.

Still, on a relative value basis, CMBS and whole loans are attractive to investors, according to Michael Moran, senior portfolio manager at Allstate Investments. "We quite frankly have to have our balancing of where else can we go with those numbers and does it make sense to be adding to the portfolio at those rates. At some point, it becomes a loan to value discussion," he said.

But he added: "As we look at opportunities, it's very competitive. It's a result of low transaction costs in the marketplace, low supply of right-sized mortgages coming to market."

The whole loan market itself is facing some headwinds on the regulatory front when participants have to mark whole loans to market, but any changes would not have to occur for the next couple of years.

KFH