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CMBS May Be Grinding To A Crunch

CMBS liquidity is disappearing rapidly

It appears that the CMBS market may be headed to a rough period and may be contracting substantially. I am told the 25 small shops which primarily originate and sell paper to the 7 big banks who issue the bonds, have run out of liquidity because the banks are not buying anymore paper at the moment. This is because the market for the bonds has become very limited and they already have inventory of paper to sell. If the banks are not buying  paper form the originators, then the small shops can’t issue new loans and the system grinds to a halt, or contracts materially. This situation is not likely to be mitigated anytime soon, and may get worse if the bond market volatility does not end soon, which it is not likely to do. Given the world economic uncertainty, the continuing decline in the prospects for a sustainable recovery in Europe and China, and the near term collapse of Brazil and Venezuela, there is nowhere around the world to look for stability and growth for quite awhile.

Now we add to this the implementation of the retention rule and the confusion of how this will really work and how to price the risk, and the originators and banks are at a loss as to pricing this risk and cost of the added 5% capital. If the originators cannot price the paper, and the buyers of the paper cannot price it, the system grinds down or pricing becomes much wider than it already has to account for the uncertainty. So even if loans do get issued and closed, pricing will most likely get wider even without a Fed increase in June. Leverage is also likely to be reduced where issuers do not feel they have a good handle on the risk and pricing. The risk premium has to increase.

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Joel Ross

Joel Ross

Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.

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