Given trends taking hold during the last few months of 2012, it appears the coming year will offer welcome liquidity relief for many more small-market/small-balance borrowers - who have often had to rely on battered banks and reluctant non-bank lenders in recent years.
Amid strong bond-buyer interest, Wall Street's 20-plus active conduits are gearing up for more growth - and most if not all are welcoming opportunities to securitize small-balance loans along with mid-sized and larger mortgages. Combine today's tightened bond spreads with interest rates almost certain to remain low for another year or more, and it's a pretty safe bet that cash-flowing collateral in secondary and even tertiary markets will attract quotes for 10-year, modestly leveraged loans at mid- to high-4s debt rates.
Private-label CMBS issuance should end 2012 somewhere north of $45 billion, and many industry insiders are expecting further growth amounting to perhaps 25 or 30 percent next year - and even much more in some cases. High-yield CMBS investor giant LNR Property LLC's co-CEO Tobin Cobb suggested at a recent industry gathering that issuance could reach $80 billion - although many experts say even $70 billion is on the optimistic side.
"I hope he's right," quips capital markets veteran Matthew Rocco, national production manager with Grandbridge Real Estate Capital. But he stresses that growth in conduit lending and CMBS issuance in the coming year will depend to a great extent on multiple factors that might have little to do with local income-property market fundamentals - such as interest-rate dynamics, investor interest in alternative asset classes, or even broader global economic forces.
But Rocco expects conduits to be quite active in primary and secondary markets lending $2 million or more against reasonably performing multifamily (including manufactured-home communities in some cases), shadow-anchored retail centers, multi-tenant office buildings that don't face heavy near-term roll-overs, and well-positioned industrial properties. He also cautions that some conduits remain wary of self-storage, and many are uncomfortable with hospitality, given that the major flag brands tend to avoid small properties, Rocco relates.
MarketBeat's review of several of the CMBS issues going to market in recent months leaves little doubt conduits are again sprinkling quite a few small-balance credits into loan securitizations. Transactions underwritten by Goldman Sachs, Wells Fargo, and UBS/Barclays each included 20-plus loans of $5 million or less - and in most cases many more small-balance components of cross-collateralized portfolio loans.
Rates of the small-balance loans securitized through these bond deals are mostly in the mid- to high-4s, with some also in the low-5s. As Rocco notes, conduits attract bond investors by passing along some of the typical 10- to 15-basis-point spread premiums they can secure for loans in the $2 million to $5 million range, compared to credits of say $7 million or more.
It's a price many borrowers are more than willing to pay to avoid the personal recourse that local and regional banks typically require with small-balance commercial mortgages. And bond-buyers have generally gobbled up the recent CMBS offerings, with spreads (quoted over comparable-term interest-rate swaps) tightening pretty consistently in recent months for the highest-rated bond classes.
Conduits just can't compete with Fannie Mae or Freddie Mac on small-balance apartment mortgage pricing in larger markets the government-sponsored agencies favor for their credit-enhanced securitizations. And when life companies fund small-balance loans - targeting their preferred high-quality collateral and sponsorship - they likewise boast pricing advantages.
Hence it's no great surprise conduits are more willing to fund small-balance deals in secondary and tertiary markets, observes Jeffrey Erxleben, senior vice president with NorthMarq Capital. These lenders also appreciate that smaller markets seem better positioned for rent and value growth in the coming year than the bid-up major markets, he adds.
Erxleben also notes that conduit lenders aim to compete via speed of execution, meaning they might win deals where quick closings are particularly meaningful even if alternative lender types might under-quote them on pricing alone.
Of course terms of loans bound for securitization tend to be far more rigid and standardized than those held on bank and life company portfolios. And as the conduit market continues its revival, the clear preference today is for straight-forward 10-year maturities and 30-year amortization schedules that streamline closings and generate predictable repayment-revenue "waterfalls" for the bond-buyers, Erxleben and Rocco relate.
Bond investors - and especially LNR and other such "B-piece" buyers taking first-loss risks - also influence conduit lending leverage limits. Outside the multifamily sector, conduits today generally prefer to keep maximum LTVs on small-balance loans at 70 to 72 percent, compared to the typical 75 percent seen with larger loans, Rocco notes.
Some conduits are offering interest-only periods of up to two years for larger loans limited to 70 percent LTV - but generally not yet in the small-balance space, Rocco also observes.
Given so many billions of large and small securitized mortgages approaching maturity in a revitalized conduit arena, Rocco wouldn't be surprised if four of every five conduit loans needing to be refinanced in 2013 ends up getting re-securitized. And a lot of banks won't mind seeing some of their maturing loans qualifying for permanent financing likewise go the conduit route, rather than absorbing balance-sheet capacity for another decade, he adds.
But some refis are going to be tougher than others - as remains all too clear given ongoing CMBS distress. While MarketBeat's expert sources have demonstrated that small-balance conduit loans tend to perform better over time than larger-balance securitized credits, the latest data from analytics specialists leave little doubt the remaining commercial mortgage distress weighs disproportionately on the CMBS arena.
While CMBS loan delinquencies have improved pretty steadily over the course of 2012 - and special-servicing volume has declined accordingly - the delinquency rate remains uncomfortably high nearly into double-digits at 9.7 percent by dollar balance, as calculated by Trepp LLC. Due in great part to the ongoing hangover from the frothy 2005-07 period, conduit delinquencies today are in fact exponentially higher than average GSE, life company and bank/thrift commercial/multifamily portfolios.
