“It leaves you about a $100 billion gap,” she said. Options left include deleveraging through recapitalizations, mezzanine financing and equity write-downs. In New York, a market unlike any other, this is not so dire. “You see that in New York—people coming in and putting fresh equity in to deals,” Ms. Farrell said. “And so we feel it’s manageable. There’s money to fill that gap, and it’s already being filled. I think overall it will be fine. It’s not so insurmountable.”
The variety among markets is one reason industry experts say that its best when considering the outcome of loans coming due to take it on a case-by-case basis.
“You need to be careful not to over simply,” said Mr. Sublett, when asked about a potential gap in capital available to refinance these loans. “It’s very property-by-property, loan-by-loan specific. Some borrowers are well-capitalized, other borrowers are not well-capitalized so it just depends on the individual circumstances of the loan in question.”
Ms. Farrell said that loans that aren’t secured by high-profile New York office buildings might face pressure in the future. “I think it’s more those tertiary, smaller conduit deals that either are going to have to just deleverage or write off the equity on,” she said. “Those are the tougher ones to refinance—when you start getting into those tertiary markets.”
In addition to the market, the asset type comes to bear as well, as evidenced in investment research firm Morningstar’s August 2012 Monthly CMBS Delinquency Report. Morningstar added 445 loans in 203 CMBS transactions to its Watchlist, a measure of loan and property level credit risk, during the month of July. Of these, about 36 percent—or $1.9 billion across 116 loans—represented additions by unpaid balance in the retail sector. Office accounted for roughly 28 percent—or $1.5 billion across 87 loans. These new additions to Morningstar’s Watchlist, however, didn’t necessarily reflect property types that experts told The Mortgage Observer are most troubled.
“Compared to historical numbers we’re still at pretty high delinquency rates across all the property sectors,” said Mr. Bushart. “But retail I guess you could argue that’s performing most strongly.”
As we close out the rest of 2012, predictions for CMBS issuance for the year vary. Following its table funding arrangement, Keybank (KEY) has contributed collateral to one securitization as an originator already, Mr. Sublett said. He predicted that over the next 60 days, two more securitizations would follow—with its UBS 2012-C3 scheduled to price in mid-September and a contribution toward a Deutsche securitization in the wings as well.
Mr. Sublett agreed with the generally accepted prediction of a $35 billion to $40 billion year-end result.
“Most of my colleagues in the industry would certainly like to see CMBS larger than—let’s just pick a number—$40 billion,” he said. “But my argument is that it is still significant.”
Mr. Teichmann, at Fitch Ratings, agreed, saying that the number he’s hearing is $35 billion as well. “In terms of the deal flow that we’re seeing, there hasn’t been any pause or slowdown,” he said. “And you’re seeing not only a steady volume of transactions, but the balances on the transactions are increasing as well. Those two elements should lead to surpassing where it was that we were last year.”
Asked about headwinds facing CMBS, Mr. Sublett again referenced the importance of protecting the value of loans held in the warehouse and compressing the time that they are held. Another headwind mentioned, though, proved to come from within.
“In the CMBS industry far too often the industry tends to have a herd mentality,” he said. “One of the things that we struggle with is, ‘Do we repeat the sins of the last cycle and do we damage the credibility that we are rebuilding with investors, including B-piece buyers and investment-grade buyers?’ What you want to do is make sure that you are rebuilding the credibility slowly and carefully.”
cgaines@observer.com
