Michael Nierenberg, head of global mortgages & securitized products at Bank of America Merrill Lynch, spoke about the commercial mortgage-backed securities (CMBS) market for the March issue of PERE magazine. The following is an excerpt of that interview:
PERE: How has the CMBS market come back since 2008?
Nierenberg: Issuance has increased substantially in the past year or so. This year, we’re expecting approximately $65 billion of issuance, which should be up about 25 percent from last year, and back to levels we haven’t seen since before the global downturn. Keep in mind that a lot of that has to do with improving market conditions, but we’re reasonably optimistic and expect a robust market this year.
PERE: Why is it back in such an aggressive way?
Nierenberg: First of all, the availability of credit in the commercial real estate sector really has increased. Bank of America Merrill Lynch, for example, continues to provide credit, not just on the CMBS side but also to the broader real estate world. We’ve been significant lenders overall.
I think another part of the reason is that the CMBS market continues to offer attractive risk-adjusted returns compared to other fixed-income assets. That is a consideration in this current low interest rate environment.
PERE: Does this have to do with the economy in general getting better?
Nierenberg: We’ve seen a broad recovery in financial services, coupled with financial institutions having more cash. As a result, there’s more cash in the system and more lending activity.
In addition, when you look at the fixed-income market, there aren’t enough investment-grade securities out there at this point because a lot of markets have negative supply. In other words, pay-downs are exceeding the amount of new issuance in certain markets.
When you think about the large total return investors, they need to be able to put their money to work. That’s another factor that’s contributing to these robust markets.
PERE: How are lending and underwriting standards evolving?
Nierenberg: It’s like in any cycle. When we were coming out of the crisis, underwriting standards were extremely conservative. That doesn’t mean Bank of America or the broader commercial mortgage industry will loosen underwriting standards now that things are improving.
I think we’ve all learned from the crisis, and one of the key points is to make sure we have appropriately robust underwriting standards in place, not only for the sake of our institutions but also for our investors.
PERE: How do you predict the CMBS market will fare this year?
Nierenberg: I think the market will continue to do well, although the performance we saw last year is likely not repeatable this year. We’ve seen spreads tighten dramatically, so we’ve probably made the move that we’re going to see in terms of significant spread tightening.
That said, do I think spreads can go tighter? My answer is yes, but we’re not going to see the same spread movement that we’ve seen recently. Overall, assuming the economy doesn’t slow down drastically, we’re reasonably bullish on the CMBS market.
To read the interview in full, see this month’s issue of PERE.