Last month Goldman Sachs (GS) broke the ice by successfully printing a $400mm CMBS (commercial mortgage backed security) offering for Developers Diversified Realty (DDR). The sale was bolstered the fact that it was eligible for the Government’s Term Asset-Backed Loan Facility (TALF), but the credit markets were heartened as they watched the first CMBS deal in over a year cross the wire. In-fact, demand for the DDR mortgage bonds was so good that Goldman was able to lower the yield premium and sell the deal for more than they had originally anticipated.
Encouraged by Goldman’s success, Bank of America (BAC) brought a deal to market last Thursday (12/3/09) without the benefit of TALF eligibility. The $460mm B of A deal, secured by 44 Florida office and industrial properties that are owned by Fortress Investment Group (FIG), sold at a higher premium than the DDR deal, but it did sell.
Does this mean that the CMBS market is back and the commercial real estate liquidity crisis is over? No. $860mm in new issuance is nice to see, but let’s not forget that the commercial mortgage problem is a multi-trillion dollar problem. These recent successes amount to mere drops in a very large bucket. In-fact, to cover its upcoming, (next three year) maturing commercial real estate debt by issuing CMBS bonds, DDR would have to sell $119mm in CMBS every month for the next 36 months. And DDR is just one of many struggling REITs.
At the very best these two deals, the only CMBS deals done in more than 12 months, can only represent the meager beginning of a subdued CMBS resurgence. A healthy market could handle billion dollar plus deals involving mortgage paper owned by multiple borrowers and it wouldn’t need TALF to keep yield premiums low.
The recession, even if it’s technically over, still rages in the hearts and minds of bond traders as-well-as the American consumer. Unemployment, though stabilizing, remains historically high and disturbingly persistent. And commercial real estate, beaten down 40% from its peak, may yet have room to fall as apartment, office and retail vacancies continue to creep ever higher. Our problems have not gone away.
The CMBS market is not coming back, not like it was, not in the professional lifetimes of any bankers working on Wall Street today. The world of commercial real estate finance must be reordered on a wholesale scale. Equity holders must realize that they have no equity and they must step aside or be forced aside. Debt holders must give up on the futile dream of being paid back and must take equity ownership in the faltering properties they were foolish enough to lend against.
We are happy that any CMBS deal can get done in this environment; something is better than nothing. We are not, however, willing to give more credence to these deals than they deserve.
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Commercial Mortgage Lender, MasterPlan Capital LLC – Lending ($1mm and up) against all types of commercial real estate. Easy, 1 page commercial mortgage application form; online. Quick responses, fast closings.
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