Spreads drop, loan-to-values rise as lenders struggle to find loans for their CMBS pools

By: James DuMars, managing director-NorthMarq Capital’s Phoenix office

We’re seeing increased activity from several large banks and investment banks as they seek to accumulate loans for their CMBS programs as well as increase “on book” commercial real estate loans.

Just this week, I met with one national bank and learned that they funded approximately $1 Billion in new permanent loans in the past 60 days within their Commercial Mortgage Origination group, bringing their total year-to-date production to $1.6 Billion. Their goal this year is $3 Billion, significantly more than the $700 Million they originated in 2009. Many of these loans are slated for CMBS but if need be, the bank will hold these loans. Their plan is to take a portfolio of $500 Million to market sometime later this year. When asked about the supply of “B Piece” buyers, the bank representative replied that they believe the pool will be fully subscribed but if need be, the bank will hold their “B” piece. They’re confident in their underwriting.

Despite the fact that since 2008 no traditional type CMBS pools have been securitized, this trend to accumulate CMBS structured loans and sell them is consistent with business plans of several national banks and investment banks.

Lenders report their survey of the market tells them there’s no shortage of investors. It’s just difficult to find deals that make sense or borrowers willing or able to borrow, which in some instances involves writing a check to pay down an existing over leveraged property. This imbalance of supply and demand is creating inertia for spread compression and slightly more aggressive lending.  Again, this activity surrounds the perception that the typical CMBS pools of the past can again be profitable for firms even though none have yet to be taken to market.

For example, the recent $309 Million Pool RBS/Natixis securitized wasn’t exactly what we would call a traditional CMBS pool. Reportedly, it was multi-borrower, a total of six loans and most of the loans were nearly simultaneously closed with the securitization of the pool. Rumor has it that some of the loan documents had “flex language” meaning if need be the originator could have the borrower agree to changes to the documents to satisfy the bond buyers. Finally, the securitized portion of the pool was all investment grade rated with a private placement of the mezzanine piece.

Today’s loans range from 70-75% loan to value, 225-240 spreads over 5-or-10 year swaps depending on loan term, which equates to an interest rate of 5% and 6% respectively. Amortizations are typically 30 years with the loans sized to 10% debt yields and 1.35 X debt coverage ratios.

Rents are being marked to market or being blended to market depending on tenant credit. Typically a market vacancy is applied when underwriting or a micro-market vacancy if the asset is uniquely competitive.

James DuMars, managing director/senior vice president of NorthMarq Capital’s office in Phoenix, has more than 20 years of experience resolving complex commercial financing issues. Contact James at (602) 508-2206 or jdumars@northmarq.com