What a difference a year can make. At the 2015 Commercial Real Estate Finance Convention (CREF), participants cheered as the CMBS conduit loan machine cranked at full tilt. Panelists suggested volume of $125 billion in CMBS originations could be easily achieved.
Well, fast forward to the 2016 CREF convention held in Orlando January 31-February 2 and a decidedly different tone was found. After CMBS loan spreads steadily marched higher during 2015, volume barely exceeded $100 billion. While headwinds will hamper CMBS, panelists reflecting on CMBS conduit loans assured that deals will get done.
“I think Chris LaBianca, Managing Director and Head of Origination for UBS Real Estate Finance, best summarized the outlook for CMBS conduit lending for 2016,” commented Michael D. Sneden, Executive Vice President at ValueXpress. LaBianca suggested that deals will get done, but at the right price based on the market’s outlook on risk. LaBianca offered that CMBS conduit loans will not see the 4.5% rates prevalent in 2015 in the short run; coupons will need to be north of 5%. Class A and B+ properties will be “fine,” noted LaBianca, but B- and C quality properties may struggle to find the leverage and terms needed to obtain competitive CMBS financing. LaBianca asserted that the benefits of non-recourse and cash-out proceeds for CMBS refinances outweigh the relatively higher interest rate compared with other commercial loan products.
Other panelists suggested that with declining profits and increased regulatory requirements, many smaller CMBS originators will exit the market. Some 35 firms originate CMBS conduit loans for securitization, but some 15 of the firms each originated less than 1% of total CMBS loans originated in 2015. Some panelists suggested that many will determine the business not profitable enough to continue.
