The market for issuing commercial mortgage-backed securities might look small now, but industry experts project it could grow again, perhaps to $45 billion annually by 2012.
While nobody can guarantee that CMBS — one of the catalysts of the real estate market boom that ended in 2008 — will make as strong a comeback, signs point to a resurgence of the securitized debt market. The number of major banks looking to securitize their mortgages has grown to about a dozen from a handful, and the special servicers, the firms responsible for figuring out the best solutions to outstanding CMBS, are beginning to foreclose on the bad loans they are holding from the last CMBS market boom, real estate insiders say.
A renewal of the CMBS market could be a boon for institutional investors' portfolios because it could stabilize real estate markets by giving the banks an outlet for the real estate debt they have kept on their books, allowing them to make new loans.
A recent signal of a possible resurgence is J.P. Morgan Chase & Co., New York, which is reportedly positioning itself to sell a $1.1 billion CMBS offering. If it sells, it would be the largest CMBS issuance this year.
Guy Langford, distressed debt leader at consultant Deloitte, New York, said that the resurrection of the CMBS market has been at topic of discussion at a series of real estate symposiums Deloitte has been holding across the country over the last couple of months.
The CMBS market fell to $3 billion issued in the U.S. in 2009 from a high of $230 billion in 2007, according to the CRE Finance Council, a New York-based trade association. As of Oct. 8, $5.6 billion of CMBS have been issued.
David J. Reilly, president and CEO of Cornerstone Real Estate Advisors, a real estate subsidiary of MassMutual's Babson Capital Management LLC, Springfield, Mass., said he expects there will be a healthy resurgence within 24 months.
Real estate investors would welcome a reviving CMBS market because it would help stabilize real estate values, explained Dustin P. Stolly, vice president of real estate investment banking practice in the New York office of Jones Lang LaSalle.
“As debt financing becomes more readily available — as it clearly has the past 6 months — it facilitates more transactions,” Mr. Stolly said.
A larger, more meaningful amount of commercial real estate transactions will give investors a baseline to assess price, he said.
Real estate investment managers are lining up, buying $25 million of CMBS at a time for their institutional investors, with the idea that they can turn the loans into equity real estate on the cheap, said Mr. Stolly.
“There's a vast amount of capital chasing those transactions,” Mr. Stolly said. “There's absolutely interest, both for performing and non-performing loans” by real estate investment management firms, he said.
What's more, a number of banks are seeking to sell off their older commercial loan holdings to the market in order to make new loans, he said. As real estate values in some sectors are starting to creep up, CMBS are becoming more attractive to investors.
In addition to J.P. Morgan, Citigroup, Deutsche Bank, Morgan Stanley, Cantor Fitzgerald and new entrant Ladder Capital, a 22-month old commercial real estate finance company, are turning to the CMBS market.
The CMBS market started off slowly last year with a CMBS issuance of shopping center real estate investment trust Developers Diversified Realty Corp.'s mortgages. After the single borrower deals began to sell, some success followed in conduit deals— securities produced by companies that buy loans from banks and bundle them up— and the number of CMBS lenders has gone up.
Cantor Fitzgerald recently announced starting a securitization business, taking on a group of former Credit Suisse CMBS executives. Ladder Capital was started by ex-UBS CMBS executives.
These firms are motivated to re-enter the CMBS market by anticipated heady profits from fees as a percentage of the issuances.
“It's a trading strategy,” Mr. Stolly said. “I think you will see another couple of (CMBS issuances) by yearend.