Why CMBS Debt Has Fallen Dramatically in Recent Years
With other capital options in the market, the market share of CMBS debt in 2018 was only 16%, compared to 54% in 2007.
CMBS has fallen out of popularity in recent years. With an abundance of other capital options, the market share of CMBS debt was only 16% in 2018, compared to 54% in 2007, according to Mark Ritchie, a principal at Gantry. It is a dramatic change, considering the popularity of CMBS debt in the last cycle.
“The drop-off is a result of an abundance of money from other lending sources, the market reacting to those options and past experiences with CMBS,” Ritchie tells GlobeSt.com. “However, if CMBS further deteriorates, undoubtedly all CRE asset classes will be negatively impacted. Most notably, the first problem will be a re-pricing of properties supported by CMBS lending, and then eventually leaking into all CRE asset values. It’s time for the CMBS industry to address the changes required to meet the needs of an ever evolving borrowing community.”
One reason that CMBS has fallen out of popularity is because the debt isn’t rate locked. “CMBS loans aren’t rate locked until closing—though we usually have a good idea of a range of pricing—which can impact loan proceeds at the eleventh hour vs. locking interest rate at loan application with a life insurer,” says Ritchie. “We ask our borrowers to consider each CMBS financing akin to an IPO or a bond offering, as there are a number of similarities to pricing a stock or a public company bond offering and CMBS financing. When our CMBS borrowers understand the vehicle in this context, it makes the process and structure palatable.”
The second issue borrowers have had with CMBS comes during the closing and servicing post close. “CMBS is the outgrowth of the collapse of the CRE industry in the late 1980s/early 1990s,” says Ritchie. “Therefore, CMBS documentation was constructed based on that single experience compared to Life Companies and Banks that have developed programs built on many decades of lending experience. Their documentation generally reflects rational needs of the institution balanced against market forces. Our clients understand this nuance and their expectations are managed accordingly.”
After closing, borrowers continue to struggle with special servicers. “When financing through a Life Insurer/Bank, the borrower is the customer of that institution,” says Ritchie. “The Life Company and Bank’s ongoing client experience is important, while within a typical CMBS structure the customer of the pool’s loan servicing agent is the directing certificate holder, which is represented by the special servicer. The typical servicing entity generally has no incentive to provide customer service to the borrower.”