The prognosis for CMBS conduit loan origination in 2011 and beyond was discussed at this year’s MBA CREF convention by three of the most active originators of CMBS loans right now, Richard Schlenger of Citigroup, Roddy O’Neal of Goldman Sachs and Dennis Schuh of JPMorgan. In addition, Warren DeHaan of Starwood Property Trust provided insight into hospitality lending and CMBS. The panelists suggested that large loans will be prevalent near term; they all said that current staffing levels are modest relative to the peak of the market and staff is struggling to keep up with deal flow. In addition, within the deal flow many transactions do not meet current CMBS lending criteria, but are consuming resources as loans are screened. As a result, smaller loans are being set aside to focus human resources on larger loans.
Second, the panelists echoed that CMBS buyers are now completing more due diligence on the underlying loans than in the past. This includes investors in all classes of the bonds, even senior investment-grade bonds. In order for investors to be able to analyze the underlying real estate, the number of loans must be limited to around 50 loans. This is also driving larger average loan size. John Prout, COO of UBS US Real Estate Finance, confirmed that investors were challenged to review all 47 loans on 83 properties prior to deal pricing on Monday, February 7 for its CMBS deal with Deutsche Bank. He noted the average loan size in the deal was over $40 million.
With regard to underwriting standards, the panelists noted that debt yields are compressing fairly quickly and they are concerned about it. The first CMBS deals in 2010 provided debt yields in the 14% area; now they are quickly headed to 10%. The most recent 2011 CMBS deals provided debt yields of slightly over 11%, but look for new deals to be in the 10% area. One panelist noted that they closed a multifamily deal at slightly over 8% debt yield and another noted that deals are starting to be limited by 1.25x debt service coverage and/or 75% LTV rather than debt yield.
The message: Look for a continuation of fewer, larger loans in CMBS issues in 2011, but with increasing leverage. Until the large loan inventory is depleted, originators will not have much interest in small balance loans in the near term.