THE COMMERCIAL MORTGAGE-BACKED SECURITIES (CMBS) market has grown so much in the last several years that it is becoming the dominant form of financing for commercial real estate, leaving other lending sources lagging behind.
"The CMBS market is worth about half a trillion dollars today," says John Levy, president of John B. Levy & Co. Inc., Richmond, Virginia, a real estate investment banking group. "Ten years ago, it was worth zero. A decade ago, the life insurance industry was the dominant player. Today, it has about $250 billion [worth of commercial real estate loans in company portfolios]" compared to $240 billion 10 years ago, which indicates that the sector's commercial mortgage business hasn't grown very much, says Levy.
Joseph Hu, managing director, global real estate finance research at Standard & Poor's, New York, estimates that the net increase in commercial mortgage debt for 2003, based on second-quarter 2003 data from the Federal Reserve, will be roughly $182 billion--including multifamily mortgages--which is a record. One-third of the capital going into commercial mortgage debt is for multifamily, he says.
"Life insurance companies only contribute about 3 percent of the funding today for new commercial mortgages," says Hu. Thirty-six percent of commercial mortgages are funded by CMBS and 37 percent by commercial banks, he says.
In 2004, CMBS will be the leading source of commercial mortgage originations, Hu predicts.
"If you only look at holdings, life insurance companies still have a lot of loans, but they're not competing in [the commercial mortgage] market" for new originations, Hu says. "The reason CMBS is taking over is that [originators of loans going into CMBS pools] are offering better deals in terms of rates and terms, and they are making loans faster than insurance companies," he says.
"Life companies are usually more conservative underwriters and they are often interested in a lower leveraged transaction," says Levy. On the plus side for insurance companies, from the borrower's standpoint, he says, "they offer a more personalized approach to servicing."
Even with the decline in commercial mortgage originations by life insurance companies, large life companies are still investing 15 percent to 20 percent of their total invested assets in commercial mortgages today, says Jose Siberon, director of financial services ratings at Standard & Poor's. While that range hasn't changed over the last 10 years, he says, it is a big range and today it is closer to 15 percent than 20 percent. These companies invest another 6 percent to 10 percent in CMBS, and that allocation is growing, says Siberon.
"In the last two years, it has become more competitive [for life companies] to invest in direct commercial loans," says Siberon. The yields are less attractive as more banks and insurance companies compete for this business, he says. As a result, buying CMBS has become more attractive to insurance companies.
"All assets are getting tougher to buy," says Siberon. "Spreads are tightening in corporate bonds, so a lot of companies are looking for alternative asset classes, including CMBS."
CMBS volume down in 2004
Although the popularity of CMBS has grown over the last couple of years, the issuance for 2004 is expected to drop about 10 percent from last year. The reason for this, according to Jeff Mudrick, senior vice president of commercial mortgage research at Lehman Brothers Inc., New York, "is that we think interest rates will be higher by the end of the year. This [development] will push the amount of issuance down, because there will be fewer real estate acquisitions," he says.
For 2004, Lehman is predicting that there will be $70 billion of CMBS issuance in the United States and an additional $22 billion in foreign markets, says Mudrick. This compares with $82 billion in the United States in 2003 and another $20 billion worldwide, he says. …