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It is hard to make the case that CMBS originations might be poised for a thaw when comparing this year’s activities to last year’s immense volumes. Industry statistics put CMBS originations last year at this point at close to $90 billion. This year, they are closer to $9 billion. Still, though, Jere Lucey, managing director of real estate investment banking for Jones Lang LaSalle, says that, if one considers just the economic case, CMBS lenders may be able to start originating loans at a more rapid clip. One barrier to a revival, he tells GlobeSt.com, is that lenders do not have a way to hedge the fixed rate loans they accumulate on their books before they are securitized.

GlobeSt.com: Please explain why we’ve reached the point where the economics are making sense for CMBS originations again.

Lucey: The CMBS delinquency rate and commercial property fundamentals have remained relatively positive. As a result, spreads on CMBS have come in significant – thus taking us closer to a break-even point. Also, a few more deals have originated in the past few weeks – nothing compared to last year’s volumes, of course. But still a good sign.

GlobeSt.com: Can you explain what you mean by the need for an effective hedge on the CMBS pipeline?

Lucey: All things being equal, before we start to see CMBS lenders lending again there will be pressure on them to closely manage risk while accumulating the loans before they are securitized. There can be in the course of a month a 10-point swing in margins in a business where people are hoping to make two points. CMBS originators, if they get back into the business, will want to pass on the costs of more effectively hedging a fixed coupon to the borrower.

GlobeSt.com: Won’t the cost of this hedge add onto the cost of CMBS, making it still an unattractive option?

Lucey: Yes, also the cost of hedging will have to factor into the economic case for CMBS. That is an added cost that will have to come in line before CMBS lenders enter the market.

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