CMBS Market Rises From the Grave

Are investors being led to slaughter?

Inquiring minds have been watching the internet begin to buzz from an article by SNL entitled “Already, concerns of ‘terrifying’ exuberance in CMBS” where people are wondering what it means. In the article:

At several recent conferences, market participants enthused about the prospects for CMBS in 2011.

“Is that terrifying? Absolutely,” Poggi said, adding that the nontraditional investors are still showing prudence. “I think it becomes, ‘Uh-oh, put on the brakes time,’ when the see-saw goes heavily weighted toward the nontraditional guys coming in and taking stuff down just to take stuff down.”

Poggi was not the only industry observer taken aback by market participant sentiment at a recent conference. William Hughes, managing director of Marcus & Millichap Capital Corp., attended the Mortgage Bankers Association’s commercial real estate financing conference in San Diego this week.

He called the enthusiasm from issuers in attendance startling. Several analysts have projected that CMBS issuance in 2011 will total anywhere between $35 billion and $50 billion. Hughes predicts $35 billion to $40 billion. But issuers at the MBA conference said they expected to issue far more, putting the extrapolated total market’s 2011 issuance as high as $80 billion, Hughes said.

“That was the shocking part,” Hughes said. “It just amazed me the numbers they were throwing out.”

On top of that, Hughes said the number of issuers looking to get into the CMBS market has exploded to between 22 and 25 players.

“There are more players today than there were in the heyday of CMBS in 2005 to 2007,” he said. “It’s incredible.”

Basically dead just months ago, the CMBS market has roared back to the point where industry observers have started to raise concerns that irrational exuberance might be around the corner. And what is causing people to get so excited about the future of the CMBS market? Because there have been two large deals: a $2.2 billion issuance from Deutsche Bank and UBS, and a $1.55 billion security from Morgan Stanley and Bank of America Merrill Lynch.

But why would professionals see just two deals and become so overly excited while the market is suffering from several ‘problems’ right in plain sight…the MERS problem, the huge shadow inventory, high unemployment, governmental debt problem, etc. In the wake of all of these issues why has this new sentiment set in?

We at feel that it is a simple combination of two things happening:

1) A downtroddened industry is craving a comeback (not a good economic predictor).

2) Money is fleeing from the RMBS market with nowhere else to go.

Quite simply put this is another disaster in the making. And sequels never turn out even as well as the original. We are seeing right before our eyes what happens when the free-market is not allowed to adjust on its own. Not only do losers become winners, and vice versa; but the actual psychology of the marketplace is changed. It even bleeds into other markets.

With the recent court decisions around the country against MERS and voiding mortgages, investors are looking for a quick exit from the RMBS market and the CMBS market is the closest to them. Yet, how can the commercial real estate market be in a ‘good’ place before the residential market stabilizes? Historically, commercial real estate lags the residential market by about 18 months.

Then again, about 18 months ago residential real estate thought that it was making a comeback. Remember the enthusiasm the tax-credit programs injected into the market? That was the summer and fall of 2009…about 18 months ago.

In other words, there is no reason for this new-found enthusiasm.


2 Responses

  1. are investors being issued hazmat suits?
    it sounds as though it’s more a case of swine-flu spreading, again.
    sorry, the photo was just too inviting.

  2. Quite all right, Louie. I like it. Thanks for commenting.

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