CMBS issuance could increase to $125 billion in 2014 from an estimated $90 billion in 2013, according to Anthony Orso, the CEO of Cantor Commercial Real Estate.
He bases his extraordinarily bullish view of the sector on the $1.7 billion loans coming due in the future, which will create borrower demand for refinancing.
The improvement in property prices has helped bolster borrower's equity and mitigated the threat that loans underwritten to looser standards will fail to qualify for new financing.
Also supporting the forecast for growth is the fact that investors are hungry for product, Orso said. CMBS have been more attractive, on a relative value basis, than corporate bonds of late.
The number of institutional B-piece buyers who purchase deals’ riskier tranches has been expanding, even with the new need to generally hold the CMBS at least five years, he said.
“It’s a tremendous vote of confidence” when it comes to the sector’s credit, Orso said.
Underwriting has loosened but “we’re still adhering to the guardrails as a result of the meltdown,” he said. Pro forma income underwriting is the “No. 1 concern for investors,” but Orso said that the practice is still scarce to nonexistent in the current market.
The “boots on the ground” strategy that Cantor used to build its business early in the market’s recovery means that the firm isn’t as exposed to the riskier large loans than competitors, Orso said. The firm's commercial mortgages generally range from $5 million to $600 million in size.
Cantor also mitigates credit risk with a diverse mix of products and geography. About half of its production lies outside of New York, where concentration tends to occur. It funds office, hotel, self-storage, industrial properties, student housing, retail and multifamily properties.
Orso expects that concerns about the retail commercial property sector will be mitigated by new demands for space from expanding “online retailers” and that new shopping center designs will evolve with customer demand.
On the multifamily side of CMBS, Freddie Mac and Fannie Mae, which had about a 60% market share this year, have slowly began scaling back at the direction of their regulator.
However with a new leader at the helm of the GSEs, it’s uncertain whether Fannie and Freddie will continue to scale back. Freddie as of mid-December forecast a $25 billion in multifamily issuance for 2014, down from an estimated $28 billion for 2013.
“We’re well positioned either way,” Orso says, citing what he calls a “significant shortage in multifamily units”.
Orso’s only real concerns for CMBS are the uncertainties related to interest rates and the possibility of another government shutdown. Either scenario could affect the capital markets and cause interruptions in the company’s business such as it had to weather in the past year.
There is little that can be done about what are unpredictable risks and Cantor will continue to stick to its strategy of issuing deals on a regular basis although it is wary of it, he said.