CMBS Says, ‘This Is Who We Are’

IRVINE, CA—The difficulties associated with special servicers during the downturn were disastrous, but CMBS is not planning to do anything different, said one CMBS lender during a recent capital-markets caucus at the Balboa Club in Newport Beach, CA, Hanley Investment Group’s president and founder Ed Hanley tells The caucus, hosted by HIG and co-sponsored and moderated by Alex Chenarides of Barry Slatt Mortgage Co., focused on financing, refinancing and the debt markets and featured experts in CMBS, bank, life-insurance and bridge financing including Colin Elder, SVP, Symetra; Todd Pollack, managing director, UBS; Robert Brown, managing director, JCR Capital; and Mihir Patel, VP, EverBank. We spoke exclusively with Hanley about the event, where the debt markets stand and the biggest challenges facing the capital-market sector today, as he sees it. What were the takeaways from the recent capital-markets caucus?

Hanley: The good news is that there are various product types still readily available for borrowers looking to buy new properties or refinance existing loans. Those products were well represented on the panel in the bridge, CMBS, life and bank areas. We asked where they see interest rates going, and in the near future, they don’t expect much, if any, of a change, and they all stress that they are offering interest-rate-lock programs for certain product types. But interestingly, we asked them, if interest rates aren’t going to change in the near future, would they recommend doing something sooner than later, and three of the four said yes. Their sentiment seemed to be that things are still at a really low point historically, and who knows what’s on the horizon, so act now.

We referenced what may affect rates is the Dodd-Frank situation, and since it’s somewhat political, they don’t know how that will affect rates. On the CMBS side, there will be fewer lenders—after the end of the year, CMBS lenders will be down to about 15 probably, so there will be a lower supply of those loans available by the end of the year.

In each of their respective loan classes, each of the panelists said they have programs that are very flexible based on the goal of the borrower. The life companies have fully amortizing loans available at low interest rates, while CMBS offers non-recourse and higher-LTV loans. The banks stress that they have a variety of product that’s flexible to meet the needs of the borrower. There are enough different lenders offering different types of programs that borrowers do have the opportunity to choose the product that fits their needs.

We did ask the CMBS guy, Todd Pollack: During the last 10 years, of at least since 2009 when things were getting tough, dealing with special servicers on these loans hasn’t been pleasant because of the CMBS occupancy or cash-flow criteria attributed with the loans, so is he doing anything different to get new business?  He said they’re going to do more volume than they ever have because there’s nowhere else to get this type of money. He said the servicers weren’t set up to deal with disasters and they were strict in accordance with the loan documents. We asked if they were doing anything different because people are reluctant to get CMBS loans, and he said, basically, “This is who we are. That was a disaster in 2009-2011, and we hope it won’t repeat.” CMBS is in that much demand that he was cocky and refreshingly frank with his answers, which fueled a lot of conversation with the other panelists. The panelists discussed the debt markets. Where are those markets and what is the outlook for borrowing in 2016-2017?

Hanley: The panelists didn’t see anything that was going to drive interest rates up. They made different points about global upheaval causing money to flow to the US, which should keep our interest rates down and in a fairly narrow range. Another panelist said a lot of people have given up on interest rates rising and is confident we will have a low-interest-rate environment for the next 12 months. Around the world, they’re in negative interest rates, so our interest rates are attractive compared to what’s going on around the world. There is no upward pressure on short-term rates. What are the biggest challenges facing the capital-markets sector today, as you see it?

Hanley: I don’t see them having any challenges. They’re lending money, and their biggest challenge will be to continue to offer the different product types they have into the distant future. After the end of the year, after the election, things may change. These lenders are figuring out how to keep their different product types available; their biggest challenge is trying to anticipate that so they’re not caught without a product to offer.

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