Working Through CMBS 2.0 Growing Pains

IRVINE, CA—As GlobeSt.com reported recently, Matthew McGovern, a 20-year industry veteran, has joined the GRS Group as director of its national leadership team. GlobeSt.com caught up with McGovern to discuss his goals in his new position as a large number of CMBS loans come due within the new next two to three years.

GlobeSt.com: What do you hope to accomplish in your new role at the firm?

McGovern: We're hoping to capture a lot of the CMBS financings that are going to be coming due in the next two to three years. A number of CMBS loans originated between 2005 and 2007, and we hope to recapture the refi wave in 2016 and 2017. There is about $600 billion of loans set for refinancing in the next couple of years, so that is our primary goal.

The other piece is going to be expanding our operations. We're looking to continue spearheading European operations as another growth area. We have six locations in London and Frankfurt, and we want to activate those markets since there are opportunities there going forward.

GlobeSt.com: What are the major issues you see facing technical due diligence, and how are they being addressed?

McGovern: The biggest issue with due diligence rolls back to 2005-2007 with the wave of refis going on with CMBS. Since then, regulations and standards have evolved. Just as we now have CMBS 2.0 as opposed to 1.0, there have been several upgrades to phase 1 ESAs, and property-condition standards have become increasingly more stringent. This is a major issue: a lot of these loans that have been locked up in CMBS for the last 10 years are looking to refinancing out, and there have been a lot of changes. To some degree, the economic landscape changed in values, and underwriting standards have changed in some cases dramatically. Loans that met the underwriting criteria in the old phase 1 may not meet that same bar today. We're seeing it already as some of these loans are being pulled forward and are being prepaid; we're seeing them with existing due diligence on them that was acceptable at that time, but borrowers are stunned at the increased reserve and environmental requirements. Specifically, we run into existing contaminated sites under monitoring programs, and even no-further-action letters are now subject to much more stringent standards. Unfortunately, borrowers don't always understand why it's an issue now when it wasn't back when they financed. So, we're helping them understand and work through that. It's not without pain in some respects. Hopefully, it doesn't impact a lot properties, but there will certainly be enough that it will impact.

GlobeSt.com: What other issues do you find most pressing for the CRE industry?

McGovern: There's clearly going to be an issue of a lot more properties to refinance. The balance of power has shifted recently, and there's been a lot of pressure on underwriting criteria, asset values and LTV, so we're seeing a very stark similarity between what would be considered the bubble periods of five to 10 years ago and today. It's not a doomsday prediction. Hopefully, as these loans do come due and we see significant product out there, things will start to balance themselves out. A lot of the life companies and banks are only about to absorb so much—they're probably getting more than their normal share, but as they start meeting quotas and filling their buckets they'll be out of the market. In CMBS, there may be a slight shift in the balancing of where loans go.