Three Things to Know in Advance of CMBS Maturities

JACKSONVILLE, FL—As real estate prices continue to rise, more and more investors are looking to get a piece of the pie. In 2015, home sales reached the highest point in nearly ten years. In the commercial arena, occupancies and rents increased in almost every sector. While the commercial real estate market has seen some volatility in early 2016, property values still continue to increase. Along with growing real estate prices, CMBS have grown in popularity over the past few years. They are the second largest source of commercial real estate debt in the country.

The risk retention rules rolled out under the Dodd-Frank Act are taking effect at the end of this year and they might take a toll on those holding CMBS. According to the Mortgage Bankers Association's survey on loan maturities, 19% of the $78-billion CMBS market is set to mature in 2016 followed by another 20% in 2017.  As a result of the new risk retention rules, refinancing this CMBS may be more difficult than in years past.

For these reasons, it's important to plan in advance to avoid encountering any potential surprises at maturity. For those invested in CMBS and borrowers whose loans have been sold into CMBS, below are a few ways to prepare.

1. Become informed about the impending changes.

Education and understanding are the first steps in preparation. Become familiar with the rules in order to navigate the changes overall. The new regulations outline that CMBS issuers have to hold on to a structure for five years and must take liability for the assets contained in the securitization. They also have to retain 5% of the bonds they sell. This is meant to ensure that issuers have a stake in the bonds, in the hopes it will reduce the risk associated with the bonds. However, greater risk retention by the issuer also means an increase in pricing. This can make it difficult to guarantee a rate of return.

2. Understand how your business will be impacted.

Despite the risk of volatility, CMBS still offer the opportunity to invest in the commercial real estate market so many investors continue to choose them. However, come end of 2016, the landscape and scope of who is investing might change.

MBA's commercial real estate research states that the CMBS market is shrinking. It highlights that analysts have reduced their expectations of CMBS issuance by approximately 25% to 30%. With the new rules, small CMBS contributors might be pushed out of the market as well. Higher costs around insuring and guaranteeing a return for the party retaining the risk could drive up costs, pricing people out from investing. If you're considering refinancing once the loans reach maturity, be aware you may face challenges and should plan ahead.

3. Know what to look for in your portfolio.

For borrowers with loans maturing in 2016 or 2017, now is the time to explore other options. This may include balance sheet lenders, as the loans may not find a home in CMBS again.

When considering balance sheet lenders, borrowers need to focus on finding the right lender. Due to rate volatility, lenders with the ability to close quickly and execute on the terms promised without re-trading are likely the best option. Borrowers should also work with a lender who can commit now to a long-term forward commitment. Going forward, the lender's role will become increasingly important to help navigate the changing CMBS landscape.

While it's uncertain how the market will react to this first wave of CMBS maturities under the Dodd-Frank Act, being well informed of the potential outcomes is key. Education and planning are essential, so spending time on this now can help ensure success in the long run.

John Randall is managing director of CRE sales at EverBank and Doug Misner is national commercial sales leader at EverBank Commercial Real Estate. They may be contacted at john.randall@everbank.com and doug.misner@everbank.com, respectively. The views expressed here are the authors' own.

For an in-depth discussion of the outlook for maturing CMBS as securitized commercial mortgages from the peak of the previous cycle come due, be sure to attend the “CMBS Report Card: Is The Upturn Ending? Plus! A Closer Look at Today's Special Service Providers” panel discussion at RealShare National Investment & Finance, scheduled for Oct. 5 and 6 at the Roosevelt Hotel in New York City.

JACKSONVILLE, FL—As real estate prices continue to rise, more and more investors are looking to get a piece of the pie. In 2015, home sales reached the highest point in nearly ten years. In the commercial arena, occupancies and rents increased in almost every sector. While the commercial real estate market has seen some volatility in early 2016, property values still continue to increase. Along with growing real estate prices, CMBS have grown in popularity over the past few years. They are the second largest source of commercial real estate debt in the country.

The risk retention rules rolled out under the Dodd-Frank Act are taking effect at the end of this year and they might take a toll on those holding CMBS. According to the Mortgage Bankers Association's survey on loan maturities, 19% of the $78-billion CMBS market is set to mature in 2016 followed by another 20% in 2017.  As a result of the new risk retention rules, refinancing this CMBS may be more difficult than in years past.

For these reasons, it's important to plan in advance to avoid encountering any potential surprises at maturity. For those invested in CMBS and borrowers whose loans have been sold into CMBS, below are a few ways to prepare.

1. Become informed about the impending changes.

Education and understanding are the first steps in preparation. Become familiar with the rules in order to navigate the changes overall. The new regulations outline that CMBS issuers have to hold on to a structure for five years and must take liability for the assets contained in the securitization. They also have to retain 5% of the bonds they sell. This is meant to ensure that issuers have a stake in the bonds, in the hopes it will reduce the risk associated with the bonds. However, greater risk retention by the issuer also means an increase in pricing. This can make it difficult to guarantee a rate of return.

2. Understand how your business will be impacted.

Despite the risk of volatility, CMBS still offer the opportunity to invest in the commercial real estate market so many investors continue to choose them. However, come end of 2016, the landscape and scope of who is investing might change.

MBA's commercial real estate research states that the CMBS market is shrinking. It highlights that analysts have reduced their expectations of CMBS issuance by approximately 25% to 30%. With the new rules, small CMBS contributors might be pushed out of the market as well. Higher costs around insuring and guaranteeing a return for the party retaining the risk could drive up costs, pricing people out from investing. If you're considering refinancing once the loans reach maturity, be aware you may face challenges and should plan ahead.

3. Know what to look for in your portfolio.

For borrowers with loans maturing in 2016 or 2017, now is the time to explore other options. This may include balance sheet lenders, as the loans may not find a home in CMBS again.

When considering balance sheet lenders, borrowers need to focus on finding the right lender. Due to rate volatility, lenders with the ability to close quickly and execute on the terms promised without re-trading are likely the best option. Borrowers should also work with a lender who can commit now to a long-term forward commitment. Going forward, the lender's role will become increasingly important to help navigate the changing CMBS landscape.

While it's uncertain how the market will react to this first wave of CMBS maturities under the Dodd-Frank Act, being well informed of the potential outcomes is key. Education and planning are essential, so spending time on this now can help ensure success in the long run.

John Randall is managing director of CRE sales at EverBank and Doug Misner is national commercial sales leader at EverBank Commercial Real Estate. They may be contacted at john.randall@everbank.com and doug.misner@everbank.com, respectively. The views expressed here are the authors' own.

For an in-depth discussion of the outlook for maturing CMBS as securitized commercial mortgages from the peak of the previous cycle come due, be sure to attend the “CMBS Report Card: Is The Upturn Ending? Plus! A Closer Look at Today's Special Service Providers” panel discussion at RealShare National Investment & Finance, scheduled for Oct. 5 and 6 at the Roosevelt Hotel in New York City.