Prudential cautiously returns to CMBS market.
"We're dipping a toe into the water," said David Twardock, president of Prudential Mortgage Capital, at MBA's Commercial Real Estate Finance/Multifamily Housing Convention & Expo in San Diego in February. Twardock said Prudential Mortgage Capital will originate and service the loans, while Wells Fargo will warehouse and securitize them.
Wells Fargo and New York-based Cantor Fitzgerald recently canceled a $1 billion CMBS deal, Commercial Mortgage Alert reported in early February, but a spokesperson at Prudential Mortgage Capital said the company "absolutely" has not and does not have any involvement with Wells Fargo on that deal.
Industry participants forecast CMBS issuance volume ranging from $30 billion to $60 billion this year. Jones Lang LaSalle (JLL), Chicago, projected more than $40 billion in CMBS issuance for this year.
"Given the financing spigot temporarily turned off, a natural evolution occurred last year in which lenders returned to safe lending--targeting only low-leveraged, trophy assets," said Tom Fish, co-head and executive managing director of the real estate investment banking (REIB) practice at JLL. "Now, demand has begun to exceed supply and lenders are moving more aggressively to place capital."
Twardock noted that the outcome of old bond deals varied significantly based on who originated the loan. Based on losses and loans in special servicing, Twardock said, Prudential had nearly 3.5 percent to 4 percent of loan losses or loans placed in special servicing while other lenders had 15 percent.
However, while outcomes were "very different" for investors, lenders were never paid for their lending skills in the CMBS market, Twardock said, and now Prudential Mortgage Capital wants to see "exactly how that plays out as it goes forward."
He added, "We're watching that market carefully. It became a market for trading, not for lending in the last cycle, and we really want to see bow that develops because we are a lender. We're a long-term player in the market. We prefer to be in a market where lending skills are valued, and we are not sure that's the case yet in the CMBS market."
Twardock pointed out, however, that CMBS deals from the early 1990s were distressed Resolution Trust Corporation (RTC) properties, and the CMBS market continues to fill in gaps to provide capital for commercial real estate not addressed by life insurance companies and for multifamily properties not financed by Fannie Mae and Freddie Mac or life insurance companies.
"The primary impediment to financing will be the significant number of overleveraged assets that still require recapitalization and deleveraging," said Mike Melody, co-head and executive managing director of REIB at JLL. "However, a lack of capital is definitely not the problem. With more capital than transactions currently available, borrowers will be placing a greater emphasis on asset type and real estate risk, with core market multifamily and office receiving the best terms," he said.
"Clearly, there is going to be a range of collateral quality different than what I, as a portfolio lender, would go into," Twardock said. "The benefit of putting a pool together and tranching it out is that [the CMBS market] can take that risk and bring in investors that want different kinds of risks and different kinds of returns."
While multifamily properties financed by Fannie Mae and Freddie Mac currently have more effective pricing than in the CMBS sector and agency lending is still a dominant portion of the market, spreads are starting to tighten. Fish said that while the CMBS market is not going to "snap back," it is beginning to evolve.
"In the following months, we expect to see lenders move increasingly up the risk continuum as we're still in a low overall yield environment, and there's a high demand for yield generation," Fish said.
Secondary and tertiary properties and markets need a "consistent supply of debt capital," Twardock said, and pent-up capital from investors looking for higher yields--and taking higher risks--could find an opportunity through subordinate tranches in the CMBS market.
"I have a very low tolerance for credit losses in my portfolio," Twardock said. "The CMBS investors that buy the B-pieces and buy the mezzanine tranches know they are taking more credit risk than I am taking in my portfolio, but they are getting paid for it. That's the definition of a market."
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|Date:||Mar 1, 2011|
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