There were a lot of expectations for the CMBS market this year. It hit $84 billion in 2013, and some thought it could hit $100 billion in 2014. So far it doesn’t look like it’s going to reach that number, says Matthew McGovern, a director at GRS Group based in the New York City area. He tells us why originations have lagged so far in 2014 and what he expects for the remaining few months of the year. Additionally, McGovern speaks about what asset types are especially attractive for CMBS deals, among other topics.
Are there as many CMBS originations and as much activity as you had thought would take place at the beginning of the year?
Matthew McGovern: Although deal volume through the first half of the year appears on track with 2013, the market has been choppy and mostly supported by a long rally that ended abruptly in July after spreads began to blow out following increased tension in the middle east and Ukraine, and the subsequent decline in U.S. Treasury yields. Also, demand began to dry up in August with players packing up and heading off for summer vacations. September and October are expected to see a heavy flow of CMBS issuance, which should subsequently favor new origination volume throughout the end of the year as lenders clear the loan off their books and recoup capital. However, there will be some wood to chop if CMBS issuance is going to exceed 2013, or meet 2014 projections.
Tell us about how the increase in competition hurts the market.
McGovern: I definitely fall in the camp with free market capitalists, so I don’t believe increased competition hurts the market in the long term. Notwithstanding, at this point the stark reality is the economy is still sputtering along and there is a fixed amount of origination activity to go around. Accordingly, not every player will survive. Those shops with mature platforms, or proven execution, will fare better in the long run. Those shops living off the scraps will either fail, consolidate, or transform themselves into boutique shops and continue to survive off flow from good relationships and partnerships. In the short term, however, increased competition does put more pressure on already thin margins. This is great for the consumer, but generally few markets can survive a long drawn out price war. I don’t believe we are yet seeing a dog-eat-dog mentality, and in reality there is little wiggle room.
Are apartments still the most popular sector? Is that where you’re seeing the most deals get done?
McGovern: Apartment properties continue to have a good track record for CMBS and origination volume appeared to fare well in the first half of the year. This is due to the lower appetite from agency lenders and changes in agency underwriting standards that had some investors viewing CMBS more favorably. I am not sure that this signaled any real trend, however, as the expectation is that agency lines will be more aggressive in the second half to make up for lost volume.
Are you seeing any property types that are up and coming in the CMBS arena?
McGovern: Not specifically, from my view property types tend to cycle pretty regularly, mobile homes, self-storage, NNN, retail centers, office, and some residential make up most of the flow by sheer number of deals, albeit not loan size. We continue to see high volume in secondary and tertiary markets, which could be triggered by an overall strengthening of the economy.
Is there any reason to think that the CMBS market will improve in the second half of the year?
McGovern: Yes, I do indeed believe that CMBS will either improve or stabilize through the end of the year. We had very favorable conditions for the first half of the year, while some fixed income product, other than CMBS, suffered. This summer we saw the give-back, and subsequent pull-back. Now that the market is more back in-line, there is some overhang in the pipeline, plus new ground to make-up. This should fare well for the second half of the year.