Banks Edge Cautiously Back Into Commercial Mortgage-Backed Bonds
Once dominant, and then dormant, commercial real estate loans are beginning to show signs of life on the trading floor after a two-year slump.
Attracted by more conservative underwriting and the perceived bottoming-out of property values, banks like J. P. Morgan Chase and the Royal Bank of Scotland are returning to the commercial mortgage-backed securities market, albeit cautiously.
“Compared to a year or two ago we’ve come a long, long way,” said Ross Moore, an executive vice president of the real estate services firm Colliers International. “The fact there’s even discussions taking place — that’s a big step forward. Are we making progress toward restarting the C.M.B.S. market? Yes, I think absolutely.”
Before the bubble burst, nearly half of all commercial real estate deals were financed by loans related to mortgage-backed securities. As a lending instrument, they allow banks to remove loans from their balance sheets by bundling them into a diversified pool, which is then issued as a bond. The payments collected from the sales are put toward future real estate loans.
At the peak in 2007, more than $230 billion in commercial mortgage-backed securities were originated in the United States, according to data provided by Colliers International. But with eroding property values and an inactive real estate market, new issues plunged to $12 billion the following year and to just $3 billion in 2009.
Since the beginning of June, there have been eight issues of commercial mortgage-backed securities, amounting to an estimated $5 billion in loans, real estate analysts said. As much as $10 billion in commercial mortgage-backed deals are expected to be completed by the end of the year, said Marielle Jan de Beur, a managing director for structured products research at Wells Fargo Securities.
While the majority of the deals so far have been single-borrower issuances, a $716 million origination by J.P. Morgan Chase earlier this month was backed by 36 loans on 96 assets.
The Royal Bank of Scotland, meanwhile, issued a $309.7 million offering in April. Comprising six loans on a total of 81 properties, it was the first multiple borrower bond of its kind since 2008, experts said.
“A lot of this is being driven by the financing that is coming back into the commercial real estate market,” said Brian Lancaster, a market expert at the Royal Bank of Scotland. “That said, the market is still what I would call very bifurcated.”
Well-tenanted properties in large cities like New York are receiving financing at low rates while some Class B buildings in smaller cities are losing value and struggling to secure loans, Mr. Lancaster and other analysts said. As a result, lenders with an eye toward future commercial securities are chasing a small pool of quality properties.
“It really is a tale of two markets,” said Spencer Levy, a senior managing director at CB Richard Ellis. “There are those assets that have strong cash flow and there are those that don’t. Those that do will find a home in today’s market and have a robust relationship with lenders, insurance companies and conduits. And those that don’t, it’s almost as if you’re seeing them fall off a cliff.”
The response by investors has been positive, with demand for most of the commercial mortgage-backed issues exceeding supply, analysts said. Lenders attribute the success to conservative underwriting standards that did not exist in 2007, when loans were aggressively made based on projected income streams rather than a property’s current cash flow.
Some lenders also praised the government’s Term Asset-Backed Securities Loan Facility program, or TALF, which helped propel the securities markets by providing equity and debt capital to lenders. That program ended earlier this month.
“That helped the balance sheets of both lenders and investors in terms of their loans and so it’s been really positive,” said Lisa A. Pendergast, president of the CRE Finance Council, a real estate finance trade association. “I think now you’re finally at a point where you can kind of be comfortable with your balance sheet and your portfolio.”
The success of the J. P. Morgan and Royal Bank of Scotland deals has already prompted competitors like Wells Fargo Securities , Deutsche Bank and Morgan Stanley to cultivate commercial real estate loans for coming C.M.B.S. offerings, said John D. Lyons, president of the United States division of Savills, the real estate company based in London.
Like J. P. Morgan Chase and the Royal Bank of Scotland, both of which had smaller investment groups as partners, many lenders are combining their portfolios with those of other institutions in an effort to move commercial mortgage-backed deals out into the market.
“These lenders are beginning to make and warehouse loans because they believe that securitization has become viable again, although tentative, and will certainly be a preferred outlet for them to raise additional capital,” Mr. Lyons said. He added that his firm was raising about $1.5 billion in financing on behalf of his domestic and foreign clients.
Marcus Giancaterino, a managing director at Citigroup, indicated that the big banking company was also poised to re-enter the commercial mortgage-backed market.
“It’s fairly certain that all of the banks that were historically in this business will go back into this business if they haven’t already,” Mr. Giancaterino said. “And I think you’ll see more activity similar to what we’ve seen in the past few months.”