Capital Markets Showing Some Signs of Life

Aug 25, 2009
By: Tonie Auer, Contributing Correspondent
Commercial Property Executive

Strong interest in public markets and the slow but steady return of securitization provide some indicators that relief in the commercial real estate market may be on the way, according to the latest capital markets report by Cushman & Wakefield Sonnenblick-Goldman.

“We’re seeing some of the basic ingredients for some return of the securitization market starting to appear,” Doug Hercher, executive vice president of Cushman & Wakefield Sonnenblick-Goldman, told CPE. “It has really been over a year since the last significant public commercial real estate securitization took place in the U.S.,” he said, noting there have been some in Europe during that time.

The market is starting to see prices on senior CMBS improving significantly, Hercher said. The highly successful launch of Starwood’s mortgage REIT, which raised $800 million in its IPO, demonstrates that there is strong interest in the public markets in vehicles that will provide debt liquidity for CRE, Christopher T. Moyer, analyst with Cushman & Wakefield Sonnenblick-Goldman, said in the report.

“The Starwood REIT is an example of a company formed to take advantage of the liquidity and TALF program,” Hercher said.

Some of that capital will be used to purchase existing CMBS bonds, but much of it is committed to new loan origination and should be placed quite quickly given the strong demand for financing, Moyer stated. Starwood is targeting loans on high quality real estate at 8 to 9 percent rates with 1 to 3 percent loan fees. In some instances, they will be competing with cheaper life company and bank capital, which may require them to venture further up the capital stack, Moyer added.

“We’re also starting to see pricing and underwriting become more reliable now that people are a little more comfortable with things,” Hercher said. “That is an improving development because, ultimately, in commercial real estate everyone should want to see securitization come back and be a provider of liquidity. It won’t be like 2006 and 2007, but it would provide a strong sense of liquidity in the marketplace, especially for the bigger deals which are difficult to transact right now.”

Blogger Comment: Other stories about renewed interest in CMBS bonds include China’s sovereign wealth fund to invest up to $2 billion in U.S. mortgages and TALF Update: Fed Gets $2.3 Billion of Commercial Mortgage Requests

Anecdotal evidence suggests that the CRE portfolios of many regional banks continue to be over-valued by 20 to 50 percent, Moyer said in the summary. In fairness to those banks, many of their assets are difficult-to-value development deals, land parcels and value-add office/industrial. As a result, until the banks generate enough earnings to allow them to comfortably book those losses – either through sales or writedowns – it is expected that impaired loan portfolios and REO will sit on their balance sheets, Moyer added.

Additionally, Moyer’s summary stated that as Cushman & Wakefield Sonnenblick-Goldman analysts predicted in late June, AAA spreads rallied strongly through the summer, with five-year and 10-year senior bonds tightening 175bps to T+375 and 125bps to T+600, respectively.

“The success of the TALF program has led to its being extended by three months for legacy bonds and six months for new issues. For new loans, the TALF program will be most attractive at low leverage levels, generally under 50 percent, since the mezzanine and B-note funding required to achieve 55 to 65 percent LTV financing is still relatively expensive,” Moyer stated.

Both the qualitative and quantitative feedback heard suggests that the housing market has bottomed, according to the summary. Whether it’s the stories from brokers in western Florida who report that inventory is down to six months, having been as high as 14 months in late 2008, or the Case-Shiller Top 20 Markets index, which in May turned positive for the first time since mid-2006 and showed even stronger month-over-month home price growth in June, it is clear that prices and mortgage rates are low enough to pull people off the sidelines, Moyer stated.