Investors likely to maintain appetite for riskier CMBS 2.0
New deals through a rejuvenated commercial mortgage-backed securities market, known as CMBS 2.0, may reach as high as $35 billion in 2011, according to Barclays Capital analysts. Although this remains short of historical highs during the boom years, the new issuance is at the expense of the strict underwriting seen in earlier CMBS 2.0 deals. At its peak in 2007, the CMBS market produced $200 billion of issuance. When the financial markets froze in 2008, conduit originations were put on hold until the fourth quarter of 2009. Green shoots emerged in the back half of 2010, resulting in $6 billion of new issuance. The trend continued growing in the first quarter with another $7 billion issued. So far in the second quarter, $14 billion of CMBS has been issued in 13 deals, BarCap said. While capitalization rates -- or the ratio of net operating income for investment compared to cost -- declined across all property types since the middle of 2009, property values increased and investor appetite is up. PricewaterhouseCoopers said commercial real estate investors were looking for more risk in a survey conducted during the fourth quarter. "This further boosted confidence for investors looking to take credit risk," BarCap said. "With this self-reinforcing cycle in place, we expect brisk issuance over the coming years, with $30 billion to 35 billion in 2011 alone." Investors wanting more risk became the catalyst for these new deals, BarCap said, especially as underwriting standards sunk in 2010. Last year, the average loan-to-value ratio at issuance of the securities dropped to 58% from 70% in 2007. CMBS 2.0 registered its first delinquency in April. And new risk-retention requirements put out by regulators could keep some deals from getting to market. The new rules proposed in late March require MBS issuers to put excess proceeds from a deal into a premium capture reserve account to cover potential losses. However, the rule does allow issuers to pass the 5% risk retention on to investors buying the securities at a riskier slice, which could limit its effect on CMBS issuance. "To be sure, these are only preliminary proposals that will likely be modified before the final rules are drafted," BarCap analysts said. "As such, CMBS issuers still have two years to comply with these regulations once the rules are finalized; we expect these to come into effect only in the middle of 2013." For an in-depth look into CMBS 2.0, grab the May issue of HousingWire. Write to Jon Prior. Follow him on Twitter @JonAPrior.