Tuesday, January 25, 2011

CMBS Debt Values Soar
Bloomberg has an article on commercial real estate debt this morning.  CMBS prices are increasing as investors are betting the worst in commercial real estate is over. Here are a couple of points I noticed:

Investors are buying bonds tied to hotel, shopping center and skyscraper loans as more financing becomes available to borrowers, helping halt a slide in real-estate values. U.S. commercial property prices, which have declined 42 percent from their peak in 2007, rose for the third consecutive month in November, Moody’s Investors Service said in a statement yesterday.

So-called junior AAA commercial-mortgage backed securities, which are less insulated from losses than senior and mezzanine AAA classes, have increased almost 21 percent to 87 cents on the dollar during the past three months, according to data compiled by JPMorgan Chase & Co. The bonds, valued at about 51 cents six months ago, are at the highest levels since June 2008, JPMorgan data show.
Enthusiasm for real estate debt is generating new debt issuance:
Sales of commercial-mortgage backed securities are poised to climb to $45 billion this year, according to JPMorgan, after banks arranged $11.5 billion of the debt in 2010. Rising sales make it easier for property owners with maturing loans to refinance. Issuance plunged to $3.4 billion in 2009 compared with a record $234 billion in 2007, according to data compiled by Bloomberg.
Real estate has always been finance driven.  When money is available, deals got done.   It is hard to know exactly how much the lack of financing comprised of the 42% drop in real estate prices over the past three years.  In 2006 and 2007, there was $203 billion and $234 billion respectively, of CMBS debt issuance, which led to a frenzy of commercial real estate deals, like the huge Equity Office Properties buyout in early 2007.  When the debt crisis started, the flow of easy debt stopped.  In 2008 and 2009, CMBS issuance dropped to $12 billion and $3 billion, respectively, or just 5% and 1% of the amount issued in 2007.  I would argue that the lack of financing played a larger roll in the price drop of commercial real estate than the recession.  This finance influence can be seen in the market for Class A commercial office properties and multifamily properties, where reasonable debt is available and the demand is strong and cap rates are low.  Lower quality properites are not afforded the same type of debt, and therefore cap rates are higher and demand is not strong, which has lead to a bifurcated market.  

The estimate of $45 billion in CMBS issuance for 2011 is good news.  While it's only about 20% of the 2007 level, it's a big improvement from the paltry levels of 2008 and 2009.  More debt will help the overall commercial real estate market and the existing CMBS market.

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