CMBS Market Looks Strong in 2015
A year ago, CMBS market experts projected that issuance would be close to $100 billion in 2014, and despite some pauses in activity during the year, the prognosticators got it right. Issuance reached a post-recession high mark with $95 billion of new product, up from $83 billion in 2013. In addition, loan delinquencies dropped over the past 12 months from 7.25 percent in January 2014 to 5.66 percent in January 2015, according to Trepp LLC.
With worldwide investment capital increasingly targeting U.S. real estate, it’s no surprise that issuance is expected to rise again this year, to an estimated $125 billion. That total is still far below the peak levels of a decade ago, when annual issuance exceeded $200 billion. But those levels were not sustained for long, and the peak years were followed by years when there was little or no activity. The current pace – robust but not frenetic – may be better maintaining stability over a longer period.
Yes, underwriters are getting more aggressive on terms such as loan-to-value ratios, and given the capital driven nature of the market, easing off standards can be a long-term concern. But some degree of erosion in standards is inevitable, given the strength of real estate demand by tenants as well as investors. In this market, it would be more disturbing if terms weren’t getting better for borrowers.
Still, speakers at the recent MBA CREF conference expressed concerns about too many players jumping back into the market. More competition places greater pressure on underwriters to stretch their criteria, and perhaps more important, firms that jump in and out of the market opportunistically may not have the experience or platform to ensure standards are being met.
Everyone involved in the market needs to be aware of how far terms are being stretched to win deals. There’s no cause for alarm today, but in this business, things can change quickly.