Trepp’s Manus Clancy Talks CMBS, Retail and Office Fears

Mr. Clancy: I was born in Flushing, N.Y., but spent most of my childhood on Long Island. My first exposure to commercial real estate was when the Smith Haven Mall opened, but the real memories came with the arrival of a 7-Eleven, which I could walk to, unsupervised, for Slurpees.

How did you get your start in the CMBS world? 

I began as a securitization generalist, helping clients model and bring CMOs, MBS, ABS and even some tax-exempt housing bonds to market. In the mid-1990s, when the CMBS market was emerging, Trepp made a conscious effort to prioritize CMBS. We felt that the “lumpiness” of the asset class made it different from residential mortgages, credit cards, auto loans and home equities. We thought that it would play into Trepp’s strengths of model building and data analysis.

What is your prediction for CMBS new issuance for the rest of 2015? Will the numbers surpass last year?

Trepp started the year forecasting that the U.S. market would hit $130 billion, which put us at the higher end of experts’ predictions. With low interest rates and tight CMBS spreads, we suspected that many borrowers would not wait until their 10-year maturity dates in 2016 and 2017 to refinance, but would look to refinance as soon as they could do so freely or arrange a short-term defeasance. Those expectations have largely played out. The market may not get to $130 billion, but it should easily surpass last year’s total and come in above the consensus estimates. Absent a market disruption, Trepp expects volume in the second half should be at or above the level for the first half of the year.

What underwriting trends have you been seeing in new issue CMBS loans?

There has been a lot of talk of underwriting standards sinking, unfavorable debt service coverage ratio and loan-to-value creeping up, and more pro forma underwriting. The trends are certainly there now, but it does not feel like 2006 or 2007 at this point. The market is on firmer footing than it was seven or eight years ago.

What U.S. markets are you watching right now?

There are several trends that concern us at the moment that we write about periodically for our clients. Among the many are concerns about retail commercial real estate. Sears’ problems have been well documented. J.C. Penney is another retailer with a lot of stores touching CRE debt. Beyond that, you see plenty of firms reducing stores or going out of business: Radio Shack, Gap, the ongoing Office Depot, Office Max and Staples consolidation, Wet Seal, Anna’s Linens, etc. These are generally small parcels, but the totality of the store closings can add up. Older properties are particularly vulnerable.

Elsewhere, we worry about suburban offices—Stamford, Conn., for example. We are concerned about the impact of low tax, low cost-of-business states luring businesses away from certain areas in the Northeast
and Midwest. Properties with significant exposure to expiring federal government and General Services Administration leases are especially worth watching. There is momentum in Washington to see the GSA reduce its footprint, and this could weigh on certain properties or borrowers.

What geopolitical issues are you keeping an eye on that might affect the commercial real estate market?

Perhaps not a geopolitical risk, per se, but Trepp is concerned about the falling price of oil. In markets like Houston, Denver, Oklahoma City and Tulsa there is an outsized exposure to energy firms, which have been aggressively reducing headcount. The expectation is that there could be less demand for space in energy-centric markets over the next few years.

Is there anything new Trepp is working on that industry players can look forward to?

First, because of the increased regulatory demands, many clients are seeing budgetary dollars redirected from profit centers to regulatory compliance. As a result, we are hyper-focused on creating models, data or research that can offer more information, but faster or more efficiently.

Secondly, we are spending an increasing amount of time helping our clients build models to comply with the various CCAR, Dodd-Frank, and Basel mandates. Firms that can manage these new demands most efficiently will benefit enormously down the road.