Friday, July 4, 2008

Six Months into 2008, the CMBS Market Has Failed to Recover

Jul 2, 2008 11:06 AM

When the credit crunch first broke in earnest last fall and froze the U.S. commercial mortgage-backed securities (CMBS) market in its tracks, the most bullish prognosticators predicted a mere blip. Many expected issuance in the U.S. to be down from $237 billion in 2007, but thought it could reach $150 billion. The conservative estimates put the expected 2008 volume at $100 billion.

Today, those worst-case scenarios are looking wildly optimistic.

Through the end of June, U.S. CMBS issuance had reached just $12.1 billion according to Commercial Mortgage Alert, an industry newsletter. Overall, that's a 91 percent drop compared with the first six months of 2007. In June itself, $1.3 billion of CMBS bonds were sold. That was up slightly from the $900 million in May, but down more than 96 percent from the record $37.4 billion in June 2007.

In all, analysts are no longer calling for any kind of rebound this year. Analysts from J.P. Morgan Chase & Co., in fact, expect the second half of 2008 to be even quieter than the first, with full-year CMBS issuance volume totaling $20 billion.

What's the upshot of all this? Since CMBS loans accounted for about 70 percent of all commercial real estate financing in 2007, it means prospective borrowers still have no place to turn and the slowdown in investment sales that has plagued the sector won't be resolved any time soon, according to Sam Chandan, chief economist with REIS, Inc., a New York City-based provider of commercial real estate information.

The fundamental problem is the wild uncertainty within credit markets. CMBS spreads to 10-year Treasuries have not only widened considerably from a year ago, but continue to fluctuate from month to month. As a result, it’s more difficult for borrowers to decide whether or not to take conduit loans. Further, alternative sources of funding, such as banks and life insurance companies, aren't offering the same generous terms CMBS lenders did in the past, nor are they greatly increasing their allocations to commercial real estate. Lending on commercial real estate is down across the board from 2007.

Within the CMBS sector, spreads have begun to widen once again. As of June 25, spreads over Treasuries on five-year, fixed-rate AAA conduit loans stood at 165 basis points, above the 52-week average of 147 basis points, reports Commercial Mortgage Alert. Spreads on 10-year, AA loans were at 475 basis points, above the 52-week average of 370 basis points, and spreads on 10-year BBB loans were at 1,250 basis points, compared to a 52-week average of 931 basis points. For borrowers, those rates are simply too high. Moreover, loans from other sources offer competitive pricing--an area where previously CMBS loans had an edge.

"With spreads as wide as they are, loans that are destined for securitized pools are not as competitive,” Chandan notes. “Investors are demanding extraordinary premiums as opposed to the types of spreads we’ve observed in recent memory.”

With CMBS out of the picture, the retail real estate sector saw a 53 percent drop in overall lending activity in the first quarter of 2008, according to data released last month by the Mortgage Bankers Association (MBA), an industry organization. Commercial bank originations in the commercial/multifamily sector fell 28 percent in the first quarter of the year, according to the MBA, to $228 billion. Originations by life insurance companies decreased 25 percent, to $119 billion.

All of that means that it continues to be difficult to complete investment sales deals on properties that don’t include in-place financing, says Philip D. Voorhees, senior vice president of retail investments with the Newport Beach, Calif.-based office of global brokerage firm CB Richard Ellis. Life insurance companies and regional banks tend to be much more selective in the kinds of properties they will finance, Voorhees notes. The life insurance firms, for example, require that a property feature a location in a major metro market, a vacancy rate lower than 5 percent and credit tenants before agreeing to issue a loan. They also insist on loan-to-value ratios of 60 percent to 65 percent, lower than most investors feel comfortable with.

“They’ve only got so much to lend out and that is drying up. Similarly, the local banks are reportedly approaching capacity,” Voorhees adds. “We lost one of our biggest sources of debt in the conduit market and nobody is there to replace that.”

As a result, the volume of sales transactions closed by Voorhees’ team year-to-date has been about 30 percent off compared to the same period in 2007. Voorhees has some hope the situation will improve by the fourth quarter. But with more than $11 billion worth of securitized loans becoming eligible for refinancing in the next six months, Chandan says it’s not likely.

“There are concerns about limited liquidity in the market,” he says. “We don’t expect to see significant gains in transaction volumes in the summer or early fall.”

--Elaine Misonzhnik


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Anonymous said...

Robert Sheridan is the CEO of a successful Chicago real estate & development company, Robert Sheridan & Partners, and their site is These are his opinions:
"Not All Financial Woes Are Created Equal
The failure of Indymac Bank – according to The New York Times the largest lender to fail in more than two decades – can be laid squarely at the feet of the lax (or nearly non-existent) underwriting that is part of (a big part of) the sub-prime mess. The chickens simply came home to roost.

The troubles of Fannie Mae and Freddie Mac are quite different. Freddie and Fannie underwrote loans carefully; their difficulties are a result of the unprecedented decline of home values.

In 2006, going against the conventional wisdom that single-family home prices never decline (they might stop rising for awhile, but they never decline), we predicted that single-family prices could decrease 10 to 20 percent. Painfully, that forecast turned out to be very correct – but also optimistic. We’re in a cycle now in which housing declines already are greater than at any time since the Great Depression of the 30s. And we’re not at the bottom yet.

If you don’t want to be disappointed by housing performance in the near term, disregard forecasts that the bottom is just around the corner – unless that corner is in Timbuktu. The bottom is NOT coming soon. And when it does arrive, it will not be obvious, like the bottom in the chart of the DJIA. The housing “bottom” will become apparent only in the rear-view mirror, when you realize that prices have stopped falling. Don’t expect a sharp rebound.

We will stay at the bottom for quite a while. How long that lasts will vary, as always, market-by-market."

Phil Collins said...

Investors From Europe Buy Real Estate In United States Many investor from europe and the uk are buying real estate in the united states. I've interviewed a real estate agent in california a week ago and he was telling me how much the market was bad until he started to work with investors from europe and the uk."They just have a lot of money" he said."I met them during a spring brake in europe. I said to my self there is no work anyway so I will go and travel a little bit.I think it's the best vacation I ever had and it's still continuing , the only difference is that now I'm actually making money".Investors don't need any green card, good credit, bad credit or visa. They only need to put a least 35% of the purchase price as a down payment.These investors will get a higher interest rate and if they will put 50% as a down payment they will probably get a much lower interest rate.Today the euro is much higher then the dollar.So if the american investors are excited about the foreclosures can you imagine the europeans?For the europeans everything is much cheaper than for americans, because the value of the euro as oppose to the dollar.Can a foreigner really get a loan in america?Sure they can get a loan, just like an american investor can get a hard money loan without showing any credit information, they just need to show interest. interest for a mortgage lender is measured with money. banks or hard money lenders will loan you the money but you will have to put as a down payment a big chunk of your money. Than you will not going to loose the property you've purchased and get the banks in trouble.Also there are many banks out there that are selling their Loans or notes to foreigners just because they need to take some loans off of their shelves, just the way you're trying to avoid foreclosure or trying just to sell the house.Banks today have to deal with so many issues like foreclosures, bankruptcies, notes and money in general.Most banks that have loaned money to borrowers in the past 3 years are not protected or insured. Three years ago the bank started to loan 1st and 2nd mortgages, 2nd mortgages are the cause of them not having mortgage insurance. So because they don't have mortgage insurance they will loose their money if a foreclosure is placed.So why did the banks offered borrowers 2nd mortgages?Because it was easy to qualify and a lot of borrowers tried to avoid refinancing their 1st mortgage.Banks just wanted to make money and more money and that's what they did.Now the banks are not willing to Loan 2nd mortgages anymore.Read other articles I wrote to learn more about mortgage insurance.

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