An Association for All
The following is an HTML version of this feature. To view this story in its original format, please visit the December issue of Real Estate Forum online.
Some two years ago, life insurance companies began receiving overtures from the CRE Finance Council, the erstwhile Commercial Mortgage Securities Association. Was there anything these companies needed from CREFC and if so, would they be interested in joining the organization? The life companies were puzzled—and intrigued. The former CMSA, after all, was a CMBS-oriented association and CMBS was a rival form of finance.
Intrigued, because, yes, it turned out there was something life insurance companies needed: A survey that would provide insight into the performance of their loans over the past five years. Responses would be anonymous and every insurance company that participated would get the results. Life firms were so secretive about their performance that they had little objective data against which to benchmark themselves.
CREFC worked with representatives from the life insurance firms to develop the survey, which they submitted to all companies in the industry, not just CREFC’s members. “We had more than 50% of the life company lenders participate in the survey,” Stephen M. Renna, CEO of CREFC, recalls. That first survey, as life insurance companies and CREFC suspected it would, yielded valuable information. The association is now at work on its second survey.
The survey was a turning point for CREFC. Not that long before, the association had retooled its mission and its thoughts on membership. The life insurance industry’s embrace of its approach was a welcome validation that CREFC was on the right track.
The Rebirth of CREFC
CREFC’s retooling had its roots in the financial meltdown of 2008 and the subsequent collapse of the CMBS market. As the dust settled and it was clear the securities industry would be in for a year or more of little to no activity, the association’s leaders began wondering whether an association exclusively devoted to CMBS would be viable again. And even if it could be, should it be?
What if, the thinking in those early months went, there was a broad-based association representing the views of all players of the commercial real estate industry? CMBS, yes, but also commercial banks, life insurance companies, private equity and mezzanine players? And why stop with those players? Why not include specialty and distress lenders and buyers and the workout community?
The association’s executives looked around the trade association community and realized that there was no organization devoted to commercial real estate finance. The Mortgage Bankers Association, of course, has a very credible finance division but that is largely devoted to mortgage finance. Association leaders, after much analysis of the lay of the land and the emerging needs of the market, developed a new strategic mission, changed the name to reflect this mission and hired a new CEO to execute it all.
One of the first stops—and the biggest test—was with the life insurance industry. If this constituency could be swayed to accept the premise that an umbrella organization could represent divergent commercial real estate financial communities, so would the others.
The life insurance industry came on board and, as hoped, so did the other communities as CREFC reached out to them with its mission and mantra of adding value to the commercial real estate lending community.
For the whole-loan bank lending sector, for example, Basel 3 with its complex and myriad requirements proved to be the “in” for CREFC. “Through a forum we were able to create a response to Basel 3 on behalf of the banking industry that was focused on commercial real estate lending,” Renna says.
In general terms, of course, the lenders knew what they thought of Basel 3 and its impact on the CRE industry. “But most had not done a granular analysis,” Renna says. “They weren’t in a position to focus granularly. We used an attorney to work with the banks to identify the key issues to them. Then we took that analysis and brought it back to the banks, got their feedback and ultimately crafted the industry comment.”
Entering the New Year
Fast-forward two years. CREFC’s membership counts some 250 companies, up from nearly 230 in 2011. Its membership retention rate is about 92%, compared to a rate that has historically been in the mid- to high 70s.
“CREFC is the collective voice for all stakeholders in commercial real estate debt,” says Paul Vanderslice, managing director at Citigroup and president of CREFC. “Our function is to build consensus wherever possible on topics affecting our industry. If consensus is not possible, we default to the majority opinion.”
In short, he says, CREFC’s function is to promote liquidity in the market to help real estate owners, lenders and all participants in the business. “This can only be done by providing leadership on the regulatory front and on key issues that affect issuers, investors, B Piece buyers and so on,” says Vanderslice. “Everything we do ultimately is weighed against the basic function of promoting liquidity.”
Since its launch, the commercial real estate environment has undergone significant shifts. Dodd-Frank is—or rather, will be once all of the rules for it are written—a sea change for the industry, as are the other regulatory changes.
At the same time, liquidity has returned, deal-making has resumed and there is a general sense that valuations are solid. The lending environment, in short, is more reminiscent of the pre-crash days than the actual crash.
“From the perspective of a balance-sheet lender, I can tell you that commercial real estate has definitely gotten healthier,” says Mark Myers, executive vice president and group head of Wells Fargo’s Special Situations Group. “Lenders have been working judiciously through legacy loan problems over the past four-plus years and that, along with the improving economy, is prompting them to originate more loans.”
Not that the lending environment is robust, on par with the way it was before the crash, Myers hastens to add. “But 2013 will be a fairly good year for those of us in the lending industry.”
As lenders re-entered and re-engaged after the crash, though, there was one more difference: CREFC and its mission to promote the whole industry was on the scene and providing guidance and support as each finance sector grappled with a new environment.
CMBS, not surprisingly, is still a key focus for CREFC. The industry barely registered a blip in activity during the group’s first year. Since those dark days of the crash, however, activity in the CMBS market has been rapidly building. For 2012 the industry is expected to close the year with $45 billion in transaction volume. In 2014, CMBS is expected to post $60 billion in deals.
But CREFC’s presence has proven to be very welcome in other market segments too, starting with mezzanine finance, which underwent its own shifts after the crash. Indeed, many of the changes in the mezz space complement what has been happening at CREFC, says Jack Taylor, head of the Global Real Estate Finance Group at Prudential Real Estate Investors.
“Mezz finance has been around for a long time—certainly at least a couple of decades and it did shut down with the financial crisis,” he says. “But it’s evolving as more capital enters the industry. More institutional money, to be specific, is coming into mezz, and that’s a long-term move.”
There are a lot of reasons behind this trend, starting with the plethora of great properties that have found themselves overlevered because of the financial crisis. At the same time, lenders in general, be they balance sheet or CMBS, are more conservative than pre-financial crisis, which is making it harder for these assets to find financing or refinancing.
Another shift, Taylor adds, is that borrowers of the “highest quality” are looking to mezz for funding. Borrowers are looking to the market on a more sustained basis, he explains, including some of the largest institutional owners. Indeed, for some borrowers mezz finance has become a mainstay fixture. Certainly it has its advantages: It is a form of joint-venture equity in which a borrower doesn’t have to give up his or her upside when the property appreciates.
The result of these changes is that the mezz industry cannot be considered monolithic, Taylor says: “Some mezz players are loan-to-own, looking to acquire properties. Others, such as ourselves, are pure lenders, in that we’re not seeking to acquire the properties through the debt or disrupt the senior lender relationship with the borrower.” It is CREFC’s mission to serve all of the different debt market participants, including the needs of various mezzanine players, he says. “It’s important to the efficient function of the market to have all of those perspectives represented.”
Serving the Industry
While the life insurance industry survey may have been groundbreaking and the whole lending outreach for Basel 3 utilitarian, CREFC also offers a range of activities more expected of an industry association.
The organization has spent a lot of time and energy restyling its conferences into showcase events. “They’ve become very important from a networking perspective and the opportunity to get current content from leaders in the industry,” Renna says.
Historically the association has held two major conferences. It’s created two more for New York City and Los Angeles. It has also put together a series of after-work seminars, 90-minute programs focused on a single issue followed by networking.
“The power of CREFC has been the way it’s pulled together so many voices and viewpoints,” says Diana Reid, executive vice president of real estate finance at PNC Bank. “It’s become an interdisciplinary focus.”
For instance, CREFC has been instrumental in recruiting more people to work together to improve the robustness and detail of the investor reporting package, she says. “They’re constantly listening to the investors, servicers, listening to the originators and primary servicers, making sure the standards that come out of this collaboration really do serve the investor’s need for updated information.”
Advocacy with the nation’s rule-writers, legislators and regulators is also a vital service CREFC provides. On the advocacy side, Reid says, one of the group’s most meaningful contributions was to push to get the Crapo Amendment included in the Dodd-Frank legislation. Briefly, Crapo directs regulators to consider risk-retention forms and requirements in order to ensure that regulators consider the unique nature of the CMBS market.
“CREFC made clear to Congress that CMBS is different than the securitization of, for example, auto loans. Because CREFC was able to effectively communicate that, risk retention for CMBS is handled differently in Dodd-Frank,” Reid says.
To be sure, this is still a story line that is being written, as the rules for Dodd-Frank’s implementation are still being crafted. “But that was an important hurdle to overcome,” Reid says.
Indeed, the arm of Dodd-Frank reaches into just about every segment of commercial real estate finance, including life insurance. “With everything that’s being put into place with Dodd-Frank, CREFC has been valuable in helping us stay up-to-date,” says Gregory R. Michaud, senior vice president and head of Real Estate Finance at ING Investment Management Americas.
Regulation is an area on which Vanderslice focuses. “I view my role as being the person who can best articulate the needs and current trends of the market to regulators,” he says. “Being able to communicate those views concisely to the regulatory bodies is the reason the CREFC Executive Committee asked me to take this role.”
These regulators include the Treasury Department, the Federal Reserve Bank, the FDIC, SEC and so on, he continues. “Many of the issues the industry faces, like risk retention, transferability of investments and deferring gains, can get technical and nuanced to regulators, some of whom may not have a deep background in structured finance or commercial real estate.”
The Many Forums of CREFC
CREFC has also established several forums for industry-specific groups and issues in which the members can discuss topics important to them and compare notes. The life insurance industry, for example, is “a good forum where we can talk about issues and best practices,” Michaud says.
Talks in the life insurance forum have been particularly active with all the changes taking place in the industry. In many ways, life insurance lending changes little from year to year. The industry lent about $45 billion in the commercial real estate space in 2012 and will likely lend that amount in 2013. Its favored asset types are office and—when it can wrestle them from the GSEs—multifamily. Life companies also finance, to a lesser extent, retail properties and industrial assets.
While those general parameters remain the same, there are definitely changes afoot in the space. Competition is ratcheting up for life companies, coming from CMBS, which is pricing very close if not better than life in many deals.
In response, life companies are extending loan terms to as much as 20 years. They are also expanding into such areas as mezz deals, equity-participation loans and construction loans. Life companies, too, need yield and like all other investors in the market are finding they must branch out from their traditional core plays to get it.
Life companies are also grappling with their own particular regulatory issues, such as greater demands for data. This is an area in which their CMBS counterparts could tell them a great deal as originators have been fielding such requests for years.
They are finding themselves scrutinized more by rating agencies, which are requiring more data. The life companies, in turn, are requiring more data from their borrowers to give to the rating agencies. CMBS originators have been required to provide financial statements every quarter, while life companies—up until now—have had to provide statements annually, if at all.
One conclusion life companies are coming to is that they will be borrowing lessons from CMBS’ experiences with these data requirements. Several life insurers are implementing new database systems to support the increased data demands and, in many cases, they will go live within the next year. “I can tell you that there have been many life companies that have benefited from the knowledge and industry best practices gathered by CREFC,” Michaud says.