First Signs of Life for CMBS Reincarnation

Two successive commercial mortgage bond offerings have many hopeful that the CMBS market may be showing signs of recovery while others question just how quickly this initial sign of life may jump start a dead market.

In late November, a real estate investment trust (REIT), Developers Diversified Realty Corp., broke the market with the assistance of the Federal Reserve's Term Asset-backed Securities Loan Facility (TALF). The $400 million deal was met with strong investor demand as evidenced by the significant subscription activity and the resulting Treasury price premium reduction. The offering was the first true CMBS transaction to reach the market since June 2008.

As further evidence that the CMBS market may be showing early signs of life, Bank of America followed by pricing a $460 million offering for Flagler Development (backed by Fortress Investment). That issue was secured by office buildings and industrial investment property in Florida and was brought to market without any TALF support. A third offering, a $500 million retail investment property deal for Inland Western Retail Real Estate Trust Inc., is scheduled to come to market from JP Morgan. It, too, is said to be free of any TALF backing.

Goldman Sachs, Bank of America and JP Morgan have all publicly announced that their door is now, or will shortly be, open for new securitization activity. Reports indicate that Deutsche Bank and Royal Bank of Scotland are also firing up their conduit lending programs. So far, the deals announced have been limited to single-borrower transactions that were reportedly "conservatively underwritten and well-structured". Many industry experts have commented that they believe this niche may spark a welcome revival to thawing the lifeless private-label CMBS market.

Most would agree that this is a welcome sign. The deals brought to the market thus far seem to have transparency, low leverage and, thus, have been positively acknowledged. Only time will tell whether these initial CMBS offerings will return the market to pre-2008 levels of credit availability for commercial real estate. Of course, the wild card may turn out to be how open Congress will allow the markets to be.

But, if investors continue to respond positively to these low-leverage deals, it should prove to be something of a positive catalyst for the commercial real estate sector and may stem the tsunami of billions of maturing securitization dollars that are scheduled to mature in the next couple years. Just how distressed the commercial market gets remains to be seen. Much of that will depend on the state of the economy and the substantive, yet sensible, reincarnation of the capital markets.