At the 2013 MBA Commercial Real Estate Finance Convention (CREF) “exuberance” replaced 2012’s “optimism.” The 2013 CMBS conduit loan machine is cranking full tilt: Declining spreads have made CMBS conduit loans competitive with insurance company offerings on commercial assets and within striking distance of GSE (Fannie/Freddie) offerings on multifamily loans. Should rates remain at these levels, this year’s CREF panelists suggested a doubling in volume to $90 billion in CMBS originations was not out of the question.
In fact, the crystal ballers predicted that lending would be robust across the board in 2013. According to the Mortgage Bankers Association, commercial banks and finance companies, with their balance sheets repaired, are predicted to increase lending 7% to $75 billion in 2013 (30% market share), while CMBS is expected to grow to $55 billion (22% market share). Insurance company originations are estimated to be flat at $50 billion (18% market share), while the GSEs are anticipated to decline 8% to $75 billion (30% market share) in the face of competition from CMBS and banks.
Of concern in the CMBS conduit lending arena is whether the rapid growth in CMBS conduit lending and the potential for a reduction in underwriting standards could “undermine the industry yet again” (a polite way of saying “blow up the CMBS market”). One insurance company veteran noted, “CMBS suffers from adverse selection (read: it makes loans on crappier deals), that’s why our industry delinquency is under 1% and yours is 10%. If CMBS conduit underwriting gets aggressive on these assets, watch out for another collapse.”
Another panelist noted, “CMBS is really the only unregulated lending platform, at least until Dodd-Frank provisions become law. The industry cannot expect the b-piece buyer to regulate the market, as they have the same pressure to get money out the door as everyone else. I suspect that it is just a matter of time until the CMBS conduit market overheats, and we repeat a painful correction.”