Participants at the 2014 MBA Commercial Real Estate Finance Convention (CREF) held in Orlando, Florida, agreed the CMBS conduit loan machine is cranking full tilt: Should rates remain at close to current levels, this year’s CREF panelists suggested volume of $100 billion in CMBS originations should be easily achieved. But the panel was concerned about deteriorating underwriting standards and competition compressing profit margins.
On the panel “CMBS Market Forecast,” John Burke, Managing Director at RBS, Dennis Schuh, Managing Director at J.P. Morgan and Matt Salem, Managing Director at Rialto Capital shared their opinions on what is expected in 2014 in the CMBS loan origination market:
Regarding credit quality, Burke did not expect to see a decline in credit quality, while Salem countered that it’s already happening. “Of the loans, 50% have LTV more than 70% in current CMBS issues, while prior to 2013 only 20% were above 70%,” commented Salem, who seemed to have a good grasp statistically on the credit metrics for CMBS. Schuh chimed in, agreeing that standards are declining “but underwriting standards are still good because they are declining from a very conservative level.”
All the panelists joked about the Commercial Mortgage Alert dropped at their hotel room doors: It reported 37 active conduits and the effect of the competition on their paychecks. But in seriousness, the panel worried about spread compression decreasing profit levels and the challenge to grow their originations in 2014 versus 2013 amid additional competition. Without a major market hiccup, the panelists felt there would not be much consolidation, if any, in 2014.