NEW YORK - Though the commercial mortgage-backed securities sector is currently on the upswing - with more than 10 deals in the pipeline for the rest of June and several more slated for July - last week's Commercial Mortgage Securities Association sixth annual convention in New York reiterated the significant slowdown in originations that has befallen the market, an occurrence that may cause more industry shakeup going forward.
"What's becoming clear is that you have to have an origination force in the market," said one attendee at the CMSA meeting. "You just can't be an agent; you have to have a critical mass of people dedicated to originating loans to be a long-term factor in the market, but you can't have 200 people doing it either."
"You have to have the resources to be originating loans, as opposed to going out and purchasing the loans," said another CMBS veteran. "I think originated loans are considered better than purchased loans.
"A lot of people are leaving this market kicking and screaming."
Compared to both the corporate and agency markets, CMBS is mostly calm due to a lagging rate of loan originations. Additionally, while many CMBS players predicted a more significant number of floating-rate transactions to hit the tape in 2000, that never came to fruition, mainly because short-term rates are now higher than long-term rates, and it is increasingly risky for borrowers to pay for the risk associated with a floating-rate loan.
After peaking in 1998 at $78.3 billion, last year's $66.2 billion in CMBS issuance was the industry's second busiest year. Among the most optimistic attendees at the CMSA conference, the projections for 2000 appeared to match last year's numberr. However, the overriding majority of CMBS players in attendance predicted approximately $55 billion in issuance.
According to CMBS analysts, nearly 11 securitizations could be brought to market in the month of June, totaling more than $8 billion. Traders expect some of these offerings to carry over to July and say that no more than $5 billion will realistically come to market.
However, going into decline this year will be issuance of U.S. fixed-rate conduits, as issuers report a slowdown in production. Additionally, several negative forces - lower levels of maturing loans, lower levels of acquisitions and interest rate hikes - have and will prompt borrowers to sit on the sidelines.
According to a recent report from Moody's Investors Service giving an assessment of the U.S. property markets, the strength of the major property classes, with the exception of hotels, remains stable.
In general, multifamily, retail and industrial markets improved, while office markets were stable-to-softer. Hotel markets deteriorated notably. Retail markets seem to look the best, the report states, as retail demand has been growing faster than supply, "thanks largely to continued income growth fueled by the prolonged economic expansion."
According to Tad Philipp, managing director at Moody's, much of the slack seen lately within CMBS will be taken up by increases in other CMBS product lines, large-loan production, floating-rate loans, small loans and international transactions.