During the economically chilling month of April, I typically lose my enthusiasm for labor. Indeed, during this past tax season, REIT Wrecks emitted nary a vowel. Unfortunately, CMBS bankers have no such luxury, lest they have no work at all.
The market for CMBS remains stalled, and the lack of credit availability is stunting what appears to be the beginning of a bottom in commercial real estate, particularly in primary markets. With cap rates moving rapidly down, especially in certain primary markets, now should be the time to make hay with CMBS:
The nascent recovery is causing more investors to take a look at CMBS, including insurance giant Primerica, and that is causing CMBS bankers to start picking up their phones again.
In the first multi-borrower deal since the crash, RBS closed a $310 million deal with stong demand and very competitive pricing in April, but it was a far cry from the halcyon days of 2006. The deal included by only six loans (and none of them were warehoused for more than a week), it had no B-piece and it was privately placed. The small deal size resulted in the deal being over-subscribed, and demand might have been even stronger had the deal been publicly registered.
The RBS deal is not the only sign of life in CMBS. PNC and Bank of America are both resuming their conduit lending programs, and Bridger Commercial Funding announced late last year that it would resume its own conduit program, the first such resumptions since 2008. Most notable of all, JP Morgan is still struggling working on the first multi-borrower CMBS deal since 2008, which could include up to 25 loans worth $1 billion.
The CMBS market is clearly starting to defrost, but it’s by no means thawed. The critical piece in any large revival in the CMBS market is still missing, and that is the B piece buyers. Last month, I spoke to a large but still very much former B piece buyer about the RBS deal. This person remarked that traditional B piece buyers were “thoroughly incapable” of investing in any new deals, which is why the RBS deal did not include a traditional B piece structure.
JP Morgan is still shopping the B piece for its deal, and it appears to be slow going, mostly because this is what happened to B piece buyers who bet wrong. Many B Piece buyers had themselves been using heavy doses of leverage to fund their purchases – and that is no longer available. More importantly, most are buried in legacy portfolios full of defaults, workouts and upside down income streams.
The JP Morgan deal will be a bellwether in the current environment, assuming the firm can find new investors for B pieces. Amazingly, if CMBS credit starts to come back to commercial real estate in a sustainable way, at the same time that the recovery in primary markets continues, all this time spent waiting for Godot may have actually been for naught.
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