Shaken by the recent 6.0 magnitude earthquake, debates continue to stir over the next catastrophic quake expected to impact Commercial Real Estate in earthquake-prone regions of California and western US. It has been 20 years since the 6.7 magnitude Northridge Quake, the costliest on record at an estimated $25 billion in insured losses. Matthew McGovern, Director at GRS Group–a commercial real estate due diligence and transaction service firm–reported that many lenders scrambled to re-check the status of assets scheduled for securitization.
While September is expected to see over 20 billion in CMBS deals in the queue, August has been very uncomfortable for CMBS issuers. As the next wave of deals are expected to hit the market, and investors turn their attention back to business following the summer vacation season, Labor Day couldn’t have come soon enough.
For risk managers, the wall of worry suddenly got bigger at the close of a summer that has seen less than favorable conditions for lenders looking to clear their books. Several factors over the summer have led to a decline in CMBS, including turmoil in the Middle East and Ukraine, and the lack of investor appetite during the summer vacation season.
Since hitting a post-crash low water mark, spreads on benchmark bonds for new CMBS offering have been trending wider–continuing to reduce the value of mortgage portfolios awaiting securitization. Such a risk has long been part of the market. However, post-crash issuers have favored the tendency to hedge against the risk of selling wide by moving to smaller pools, more securitizations, and shorter holding times. While some issuers may choose to delay issuance until more favorable and firmer ground, news reports and photos of damaged buildings and ISIS have provided CMBS lenders just another stark reminder that it’s high time to clear their books and the precarious position of holding loans too long. Essentially there continues to be little wiggle room with thin margins; and with the pipeline of deals set to come, most will favor moving quickly.
Going forward, recapitalization following the post labor day transaction, and the end of the summer vacation season, should clear way for a swollen pipeline of new originations through the end of the year. Economic conditions continue to appear favorable with increases in occupancy, rents, and values in real estate. Interest rates would appear to be remaining low.
About the Author
Matthew McGovern, based in New York City, is a seasoned veteran with over 20 years experience in assessment and technical due diligence. He is well known in CMBS circles and was part of the team that founded National Assessment Corporation (NAC) in 1996. NAC was a national leader in real estate environmental and engineering due diligence prior to its acquisition by LandAmerica Financial Group in 2002. He received his BME in Mechanical Engineering from Villanova University. Matthew can be reached at firstname.lastname@example.org or 646.760.0851