A comeback for CMBS: a search for better yields has fostered growing demand for CMBS offerings. Experts project roughly $40 billion in CMBS deals for all of last year. That handily beats the $33 billion in 2011.

Author:Leon, Hortense

A VERITABLE BLIZZARD OF NEW U.S. COMMERCIAL MORTGAGE-BACKED securities (CMBS) hit the market in the fall of 2012. For the first nine months of last year, CMBS volume reached $30.9 billion--about the same as the dollar volume for all of 2011, when the total was roughly $33 billion. [paragraph] One of the reasons so many new CMBS deals had been done through the fall is the Federal Reserve's pledge to keep interest rates near zero--at least as long as the unemployment rate remains above 6.5 percent and inflation remains low over the next couple of years. The announcement by the Fed of its intent to continue pursuing quantitative easing on Dec. 12, 2012, also was welcomed by the market. That meant the central bank would remain an active buyer of mortgage-backed securities, thereby ensuring mortgage rates remain at or near record lows. [paragraph] "Continued Fed buying and their extremely low-interest-rate policy are good things for the CMBS market," says Joe McBride, research analyst at Trepp LLC, New York. "They are making it easier for borrowers seeking new loans and refinancing, and encouraging investors to buy CMBS bonds because of their relatively attractive yields," he says. [paragraph] "Over the summer, spreads on new [CMBS] deals tightened"--an indication that the market for these bonds had increased, says McBride. "People are hungry for any sort of yields they can get," especially with U.S. Treasury rates so low.

The enthusiasm for CMBS bonds was writ especially large in September, when total U.S. CMBS issuance for that month alone was $5.9 billion, according to Commercial Mortgage Alert (CMA), a newsletter that covers the industry.

In addition, there were a number of deals slated to price in the first week of October that didn't quite get in by the end of the third quarter, including a $1.3 billion deal by Frankfurt, Germany-based Deutsche Bank AG and New York-based Cantor Fitzgerald LP, according to CMA.

Still, $5.9 billion of issuance was the most in a single month since December 2007, according to data compiled by the newsletter as of Sept. 28, 2012.

Clay Sublett, senior vice president at Cleveland-based KeyCorp Real Estate Capital, who is based in Overland Park, Kansas, says that the total dollar volume for new CMBS for all of 2012 should be about $40 billion.

"I think [a figure in that range] would be respectable," he says. "In 2011, we did [in the neighborhood of] $30 billion as compared to the year before, when there were virtually no deals; in 2013, I expect to see CMBS volume of about $45 billion, as we continue to see growth in the sector," says Sublett, who believes that 10 percent to 20 percent growth per year is reasonable for any business.

He compares these metrics with the explosion in the CMBS market between 2004 and 2007. That was not healthy, he says.

Everybody active in the market today is planning a securitization before the end of the year (meaning 2012), says Gerard Sansosti, executive managing director at HFF LP, Pittsburgh.

In addition to the biggest players in the market, such as Deutsche Bank and San Francisco-based Wells Fargo & Co., there are a few new players, including BAIT Financial Trust, Philadelphia, a real estate investment trust (REIT) and bridge lender that has begun to do CMBS loans, he says.

But players like RAIT aren't going to do a lot of business, says Sansosti. "They aren't going to lead securitizations, although they contribute loans into pools for [firms like New York-based] JPMorgan Chase or Deutsche Bank," he says.

In addition, says Sansosti, a few CMBS lenders--such as London-based Barclays PLC; Charlotte, North Carolina-based Bank of America and Wells Fargo--are allowing life companies to originate loans for their accounts. This gives the CMBS lenders another origination source and the life companies the opportunity to make loans that they wouldn't usually make, he says.

The rush to do new CMBS deals is very different from the situation that prevailed in late summer and early fall of 2011, says Sublett. In 2011, the first half of the year was good, but by the end of the summer, as the European debt crisis unfolded, people moved away from CMBS, he says. Meanwhile, to attract more interest in CMBS bonds, issuers had to increase their...

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