FEATURE: From bust to robust

In the immediate aftermath of the global financial crisis, the commercial mortgage-backed securities (CMBS) market was not pretty. Coming off its apex in 2007, when the market saw $314.05 billion in new issuance globally, CMBS offerings plummeted to $18.87 billion the following year. In 2009, the market hit bottom, with just $7.32 billion in global issuance recorded. 

Instead of fading away, the CMBS market has since experienced a rebound. Due to a number of factors, including improved overall market conditions, increased availability of credit in the commercial real estate sector and low interest rates, new issuance has increased by leaps and bounds. Global issuance in 2012 reached $52.62 billion, up 46 percent from the $36.05 billion issued in 2011. Looking ahead, many industry leaders are bullish about the future of the securitization market, predicting somewhere in the realm of $65 billion in new issuance this year. 

Michael Nierenberg, head of global mortgages and securitized products at Bank of America Merrill Lynch, is quite positive about the future of CMBS. In charge of sales and trading for all mortgage and securitized products at the giant US bank, he spoke with PERE about where the CMBS market has been, where it’s at now and why he’s reasonably optimistic about seeing a rebound in the securitized market in 2013 and beyond. 

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: What was the activity like last year?

Nierenberg: Total domestic CMBS issuance was about $43 billion in 2012. If you think about the securitization markets as a whole, we’ve rebounded from a time when there was very little issuance of anything, and now the CMBS market has come back in a strong fashion. At some point, when the industry works through some of the legal issues on the residential mortgage-backed securities side, I would expect new issuance in that market to start rebounding as well.

PERE: Why is CMBS 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: Are there any noteworthy trends in the CMBS market?

Nierenberg: What we’re seeing now are more single-asset or single-borrower deals to securitize trophy assets. It’s easier for investors to analyze a single property or a single loan. That’s not really a new innovation, but we’re seeing more of that.

We’re also seeing more mezzanine and subordinate debt lending, as you’d expect with yields so low and people looking for returns. In general, however, I think the markets are pretty conservative at this point. 

PERE: Are new players emerging?

Nierenberg: We’re seeing more participation from specialty finance companies, which are beginning to originate loans for securitization. I also should mention that, with longer-term liabilities and rates being low, insurance companies have been originating more loans to hold on their balance sheet. 

PERE: Is all of this happening because the economy in general is 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, so 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. Although credit has expanded, we as an industry are coming off some very conservative levels that were put in place on the heels of the crisis.

PERE: What products pose a challenge to CMBS? In other words, for firms looking to finance, where is the CMBS market seeing competition?

Nierenberg: With rates low, insurance companies have been active and will remain active in both the whole loan space as well as the mezzanine space. With credit starting to ease slightly and banks providing more lines, specialty finance companies are becoming a much bigger part of the market and are looking to provide mezzanine financing. Some specialty finance companies also have started to build origination capabilities. 

There’s also more balance sheet lending in the real estate space by banks. For example, when Bank of America Merrill Lynch makes loans, we coordinate with our commercial bank and do what we think is best for our client as well as for our institution. As a result, there are plenty of times when we’re looking at loans that may be good for our balance sheet and not the CMBS market. 

PERE: How has the securitization situation differed in Europe?

Nierenberg: From a securitization perspective, particularly on the CMBS side, the US market has always been more robust than the European markets. Recently, however, we’ve been seeing increased refinancing activity in Europe due to a growing demand for credit. 

The European markets haven’t had a ton of credit available to them. Since Bank of America Merrill Lynch is a global bank, we’re able to provide credit in many different countries. As a result, we’re starting to look at opportunities in Europe to support our core clients. 

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. 

Overall, assuming the economy doesn’t slow down drastically, we’re reasonably bullish on the CMBS market. I do think you need to look at other markets and other investment-grade products in the marketplace but, quite frankly, I don’t think there’s enough to satisfy demand. Therefore, the supply-demand dynamics are such that it should lead to tighter spreads on CMBS going forward.