CREJ

February 18-March 3, 2015 —

COLORADO REAL ESTATE JOURNAL

— Page 23

Finance

he numbers are in and

commercial mortgage-

backed securities lend-

ing is back.

According to Trepp, the indus-

try’s largest database of secu-

ritized mortgages, U.S. con-

duits originated $94 billion in

CMBS debt in 2014, a 9.2 percent

increase from the $86.1 billion

originated in 2013. It was the

fourth-highest annual total in

history behind the years from

2005 to 2007, when lenders origi-

nated $167 billion, $198 billion

and $229 billion, respectively.

And even more interestingly,

2014’s CMBS volume is greater

than the combined $93 billion of

CMBS debt that was originated

between 2010 and 2012. Accord-

ing to a recent survey conducted

by the CRE Finance Council,

CMBS origination is only expect-

ed to get bigger. On average,

survey respondents are forecast-

ing $125 billion of new CMBS

issuance in 2015, and some even

think that the number could be

as high as $140 billion. The num-

bers are in, but what are they

telling us? Why are CMBS loan

originations roaring back, what

could be consequences caused

by increased CMBS activity and

how does this affect you as a

borrower?

What caused CMBS issuances

to increase so quickly in 2014?

The answer is simple – improv-

ing real estate markets (includ-

ing Denver), combined with

investors’ search for yield, have

increased investor demand for

CMBS debt. Today’s average

CMBS loan carries an interest

rate of 4.25 percent, which, to

some investors, is considered to

be more attractive and have a

higher relative value than alter-

native, lower-yielding invest-

ments – main-

invest-

ment-grade

c o r p o r a t e

bonds

and

government

treasuries. For

example, on

Jan. 23, the

10-year U.S.

Treasury note

reached

20-month low

of 1.8 percent,

while

the

30-year U.S. Treasury note

reached an all-time record low of

2.38 percent. In search of higher,

more attractive yields, more and

more CMBS lenders are entering

the market. We saw the num-

ber of CMBS lenders grow from

18 in 2011 to 35 in 2014, and

more could potentially enter

the market in 2015, due to pent-

up demand for higher-yielding

investments.

The CMBS market is a sig-

nificant and important compo-

nent of the overall commercial

lending environment, and it is

imperative that we have a strong

CMBSmarket over the next three

years, when more than $300

billion of CMBS debt matures

nationwide. CMBS debt pro-

vides additional liquidity to the

market, gives borrowers more

choice and indirectly makes

alternative lending sources (i.e.,

life insurance companies, banks)

more competitive. In 2014, we

originated more than $125 mil-

lion in CMBS debt, and over the

course of that 12-month period,

we saw spreads compress, aver-

age loan-to-values increase and

interest-only terms become more

available (up to 10 years of inter-

est only). It sounds like a broken

record, but a significant amount

of money is readily available at

historically low interest rates, so

it’s a very good time to be a bor-

rower of commercial real estate

debt.

But as a result of more CMBS

lenders in the market and

increased competition, there is

increased concern that under-

writing standards are eroding.

According to Moody’s Investors

Service, one of the largest rating

agencies used to establish bond

ratings for the various bond

classes at the securitization of a

CMBS pool, the average CMBS

loan at the end of 2014 had a

Moody’s loan to value of 112

percent, a sizeable increase from

an average MLTV of 100 percent

one year prior. In order to calcu-

late the MLTV, Moody’s normal-

izes rents, operating expenses

and cap rates to address eco-

nomic cycles and stress property

values (Moody’s uses cap rates

between 8 percent and 10 per-

cent in Denver, depending on the

property type).

MLTVs typically range from 70

to 120 percent, and the prefinan-

cial crisis high was an average

of 118 percent back in the third

quarter of 2007. Based on the

increase in MLTV over the last

four years, it’s only a matter of

time before MLTVs exceed the

prerecession high.

The numbers are in but is the

story clear? Is the abundant sup-

ply of capital and slowly dimin-

ishing underwriting standards

sending a message that the mar-

ket is overheating? Only time

will tell if current property val-

ues and the underlying economy

can support the large amount of

CMBS debt aggressively flowing

into the market. Regardless of

how the story ends, today is a

great day to be a borrower.

The numbers are in: CMBS is back

Cooper Williams

Principal, Essex

Financial, Denver

CREJ.com/loan-calculator

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