NEW YORK CITY-CMBS 2.0 is a topic on many minds, but how proposed regulations concerning risk retention and recent economic upheaval will affect this growing new batch of bundled securities remains to be seen. GlobeSt.com spoke to several insiders about the return of CMBS to gauge how current economic conditions, and future regulations, factor in its return.

Any discussion of the future of CMBS must take into account events from earlier this month. First, Trepp announced that US CMBS delinquency rates had spiked in July, in fact setting a record. The percentage of loans 30 days or more delinquent, in foreclosure or REO rose to 9.89%. This marks an all-time high for US CMBS delinquency, with the value of the loans sitting at $61.3 billion, according to Trepp’s July 2011 US CMBS Delinquency Report.

On the heels of that, Fitch Ratings released similar findings, from its latest index results. Fitch managing director Mary MacNeill said in the report that “delinquencies are still trending within Fitch’s projection of 10% by year's end.”

And finally, Standard & Poor’s downgraded US debt to AA+ from AAA, prompting the Fed to announce plans to keep interest rates low for the foreseeable future. In light of these developments, who takes the risk in CMBS deals moving forward becomes a big issue. 

“A lot of what has happened in the last few weeks has been about confidence in the economy, and the commercial real estate sector is driven ultimately by the fundamentals of the properties,” says David Twardock, president of Prudential Mortgage Capital Co. “I don’t think there’s any question that there’s less confidence right now about what direction we’re going in. We’ll be watching the deals that will be coming to market in the coming weeks pretty carefully, but over the long run this hasn’t changed our view about the viability of the market, the need for the market, the likelihood that the market will play an important role.”

Schecky Schechner, managing director at Barclays Capital, says that he sees CMBS coming back and continuing to grow. “In the long run it’s going to get back to a $100 billion a year market,” Schechner says. “It’s a far cry down from where it was before, which was $225 billion, but that being said, it’s going to keep growing.” Schechner says that he hears a lot of people reference the B piece buyer as a hindrance to growth. “People talk about that being a bottleneck,” he says. “I don’t see it being a bottleneck. There’s a lot of money out there to do this.”

Proposed risk retention regulations would require the banks and B piece buyers to retain the riskiest 5% of the securities they package and sell. Some analysts have said that this will decrease investor demand and thereby decrease the growth of CMBS 2.0. Others feel that some reticence in this market brought about by risk retention regulations is a good thing.

“There’s plenty of debt capital in the market, particularly for the stabilized assets,” Twardock says when asked about the proposed regulations. “And keep in mind CMBS markets are not financing value-added deals and construction and things like that--it’s financing stabilized assets. It would slow the availability of capital and increase the cost in a way that gives me some concern, but it wouldn’t stop the recovery, it would just slow it.”

As GlobeSt.com previously reported, Prudential Mortgage Capital Co. recently formed a joint venture with Perella Weinberg Partners’ Asset Based Value strategy that will once again give Prudential borrowers access to the CMBS market. Schechner says that Barclays, an originator before the downturn, is also getting back into the game now.

“We intend to be a major player at some point,” he says “We think that it’s got long-term viability and it’s something also that’s been a good product for many of our clients. So it’s something that we intend to be a significant player in.”

Moving forward, Twardock says that his group’s eye will be on one factor, jobs, and how job growth will affect the market. “The thing that we’re keeping an eye on, more than all of this turmoil in the capital markets, is where’s the economy going and what’s the job growth number look like when we start coming out of August, September, October and the coming months,” he says. “The Fed statement that suggests that interest rates would remain low for an extended period of time--real estate’s a cash flowing asset, so low interest rates help the value and they help the prospect for cash flowing assets.”