Miami, Fla - The tone at the Commercial Mortgage Securities Association's CMBS Investors Conference was somewhat congratulatory as the industry looked back on a record 2006 - both in terms of issuance and growing market share within institutional markets. Most panelists predicted more of the same for 2007, although there were also discussions about the macro concerns affecting the CMBS market.
In fact, there were at least two separate panels devoted to the real estate outlook for 2007, including a discussion on which markets will be affected by job downturns and housing price depreciation in an overly leveraged U.S. economy. Participants also talked about foreign commercial real estate and new markets in terms of outsourcing of U.S. jobs in these areas. The panelists also fielded questions on where the best investing opportunities lie and, conversely, what the greatest investor threats on the horizon are.
Opening day forums included discussions on the emerging CDO market and the differences and similarities to more traditional and non-actively managed CMBS structures. While CDO structures offer the ability to fund future advances and to take views on credit, CMBS conduit structures are static loan pools. CDOs are also able to hold non-mortgage assets in the trusts and attract a more global investor class.
Other open discussions included the longstanding CMBS primer on the genesis, logical flow and trail of how a CMBS deal gets done and what buyers look for in terms of compensation on various risk profiles. Also on tap were selected closed-door committee meetings concerning CMBS products and policy.
The forums were well attended with a few at standing room only capacity. The conference closed out with former New York City mayor Rudolph Giuliani delivering the keynote address with a speech on leadership.
CMSA PAC and other issues
On a one-on-one interview, this year's incoming president of the CMSA Executive Committee Kent Born covered the role of the association, its plan for the coming year, the state of commercial mortgages, and thoughts on the state of the market near-term. Born also talked about the creation of CMSA's federal political action committee (PAC), which is designed to advance and address the concerns of its members to Capitol Hill.
The CMSA PAC has addressed such issues as the extension of the Terrorist Risk Insurance Act of 2002 (TRIA), which shares the cost burden in providing coverage for losses in the event of a catastrophic terrorist attack and makes the existence of larger office and commercial structures viable as an investment. Without the existence of such insurance acting effectively as credit enhancement, it is doubtful that future capital inflows in such structures would be possible. "Ideally, there would be more of a permanent solution" than the two-year extensions currently in place, Born stated. He also went on to express his optimism that the incoming Democratic chairmen of both the Senate Banking Committee (Chris Dodd, D-Mass) and the House Financial Services committee (Barney Frank, D-Conn.) would be more cooperative than the previous Republican-led efforts. He viewed Rep. Frank and Sen. Dodd as "historical proponents of some sort of government measure related to terrorism insurance" and hoped something would be accomplished for the longer term. Additionally, PAC has tackled such issues as REMIC modernization. This legislation allows for borrower modification of loans while preserving the favorable tax status.
Market views
Born also tackled several issues facing the market in the interview. He noted the recent weakening of underwriting standards resulting from the significant amounts of money put into commercial real estate outstripping demand, thus pressuring loan underwriting standards. He believes that the market still considers the longer-term implications of diminished underwriting standards rather than short-term gains. He added that he trusts that investment banks and ratings agencies would serve as gatekeepers. Born also noted the positive upgrade/downgrade profile of CMBS deals and the comfort that rating agencies have expressed in the maturing market, even reducing credit enhancement levels.
Will CMBS continue to gain market share, both in terms of commercial real estate lending opportunities and as an investment vehicle for securitized investors in general? In the interview, Born expressed his optimism about the market based on an ever- broadening investor base and the existing solid real estate fundamentals.
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