Badly Needed CMBS Issuance Inching Back

Financing availability is improving across the lending spectrum but caution still rules. Commercial banks and life insurance companies have become more active in financing commercial properties, but tight underwriting and restrictive risk guidelines will the limit their full impact on investment sales in 2011. It is clear that the CMBS (commercial mortgage-backed securities) market has also started to recover. We estimate total issuance for 2010 just shy of $13 billion, roughly four times the volume in 2009 but still a fraction of the $234 billion peak in 2007. Even prior to the market froth of 2005-2007, CMBS issuance averaged $85 billion per year from 2002 through 2004, providing a critical source of financing to the commercial real estate market. The recovery should gain momentum as the secondary market continues to expand thanks to improved confidence and better underwriting.  Approximately $8 billion of issuance is expected for Q1 2011 alone, and we agree with Standard & Poor’s forecast of total volume of $35 to $40 billion for 2011. 

The primary factors driving this recovery are slowing pace in the growth rate of CMBS delinquencies (including a growing number of successful loan modifications), improving CRE market fundamentals and increasing demand from CRE investors. The large spread between CMBS returns and alternative investments also helps.  CMBS delinquency rates are the highest in the industry, but investors are distinguishing the new round of deals from the underperforming pools of the past, particularly 2005-2007 vintage loans.