Opportunity Knocks for Some in Commercial Mortgage Market
May 21, 2007
(National Mortgage News by Poonkulali Thangavelu)
NEW YORK--The ongoing correction in the capital markets, and reassessment of risk, that has impacted
commercial mortgage securitizations also presents opportunities for some, it emerged at the International Council of
Shopping Centers’ capital marketplace conference here in mid−September.
Dana Roffman, a director with Angelo, Gordon & Co., recounted that in the first quarter of the year the
deals in the market were getting "unbelievable execution." After the subprime issues came to the forefront though,
commercial mortgage-backed securities started to be impacted since a lot of buyers of residential mortgage-backed
securities also buy CMBS.
And after negative commentary started to flow out of the rating agencies, there emerged a market situation
of record supply of paper with no buyers.
And the aggressive underwriting of recent years ended over the summer. Now, a number of deals are being
repriced and the high leverage buyers are gone.
Shawn Rosenthal, managing director with Ackman-Ziff Real Estate Group, noted that spreads widened in July
or August as the environment changed.
"No one knows how things are going to shake out. CDOs (collateralized debt obligations) allowed for
increased leverage. With that slowing spreads on mezzanine have widened," he said, adding that spreads that used to be
at 300 to 325 basis points are now at over 600 basis points due to the lack of CDO bids. And cash flow on commercial
real estate investments is now being underwritten cautiously, thereby reducing property valuations.
Aaron Walsh, managing director, Barclays Capital Inc., expects that the rates of return expected by real
estate investors or capitalization rates, which haven’t been impacted yet, could move up 25 basis points.
Jay Eisner, a principal with LEM Capital, Philadelphia, expects that deals will be of better quality in
future. One of the big changes he has seen is that "there is no rush to the finish line."
Gary Sopko, moderator of the session on creative uses of capital, wondered if there is anything borrowers
could do to prevent renegotiation of deals.
Mr. Rosenthal said that there is not a lot of certainty out there and that borrowers should move as
quickly as possible to close deals.
Wall Street is renegotiating and the leverage may not be exactly what borrowers want.
As for opportunities for mezzanine and other players to fill the void left by mortgage lenders, Ms.
Roffman noted that there is a group that is setting up a fund to buy some of the oversupply of securities on the market.
No one knows how long the situation of oversupply is going to last and if the paper is priced right, she expects it to
trade at about a 5%−15% discount.
Mr. Welsh also said that there are some opportunistic funds looking at the paper available. The investments
have to meet a minimum hurdle rate of return to be worthwhile. "People are circling right now and there is still a disconnect,"
he noted, adding that it will take a while for Wall Street to digest this paper.
Mr. Rosenthal agreed that the situation has not hit bottom yet. He expects more bad news out of the subprime
sector, home improvements to be down and less liquidity. Consumers who have taken on B&C loans find that they cannot refinance
and can’t sell today at the level they got their initial financing.
He expects defaults on CMBS to creep up and risk premiums on real estate to come back in play (which will
push up cap rates). It is likely to be another six to 12 months before things get back to where they were.
However, he expects some kind of stabilization by the beginning of 2008. The days of 10−year interest−only
financing are gone for a while though. In response to an audience question, he noted that life insurance company business
has picked up in the absence of the CMBS bids.
Mr. Welsh doesn’t think the industry is out of the woods yet, though.
Ms. Roffman expects, too, that it will get a little more gloomy, depending on how badly people get hurt,
what players are eliminated and how all this will impact the U.S. economy.
Even then, money is still interest in real estate and there are "a lot of interesting opportunities in this
interim period," as she sees it.
