Competition for CMBS loan originations is heating up, as more lenders fight for a piece of the much smaller pie that exists today.
Even with a wave of loan maturities expected to hit the market over the next three years, many in the CMBS industry believe the number of CMBS lenders vying for business in today’s market is far too many. According to Commercial Mortgage Alert, an industry newsletter, there are 36 shops that are either actively originating CMBS loans or plan to start doing so in the coming months. However, other industry estimates put the number of lenders in the market at 40, or even slightly higher.
“To say that there are too many conduit lenders today is an understatement,” says Bryan Gortikov, a director at George Elkins Mortgage Banking Company in Los Angeles. George Elkins does around $300 million in conduit business every year that is spread across about 10 different lenders. The market is hyper-competitive, with the smaller shops issuing overly competitive quotes to try and win market share, and the bigger, more established shops being forced to compete in order to retain the business that they have, says Gortikov.
Lenders are crowding into the sector for a number of reasons.
“In particular, I think some of these smaller CMBS shops are trying to ramp up to capture some of this huge wave of CMBS maturity and make some money over the next few years,” says Gregory H. Nalbandian, senior vice president and managing director at NorthMarq Capital in Morristown, N.J. They may not have sustainable business models or the pricing power compared to some of the bigger players in the industry, but they are trying to capture some of the crumbs from all of the maturities that will be taking place in the next three years, he adds.
CMBS issuance volumes were higher than ever in 2005, 2006, and 2007, with a peak volume of about $230 billion in 2007. The majority of that issuance was made up of 10-year balloon loans, which has created a wall of maturities that is expected to fuel refinancing from 2015 to 2017. Over the next three years, nearly $300 billion in conduit CMBS loan balance will mature, which is more than 2.5 times the amount that matured from 2012 to 2014, according to research firm Trepp LLC.
Some lenders are also entering the CMBS sector because they want to be able to offer their clients a comprehensive package. For example, Principal Real Estate Investors, which is the real estate division of Principal Financial Group, announced a joint venture with the Macquarie Group last fall to create Principal Commercial Capital, a lending platform focused on originating and securitizing commercial mortgages in the CMBS market. One of the reasons Principal created a CMBS arm is to service its existing clients, notes Gortikov.
Too many cooks?
The number of CMBS lenders today is comparable to the 38 lenders that were actively originating CMBS loans at the peak of the market in 2007 and 2008, according to Commercial Mortgage Alert. However, the key difference is that lending activity, although steadily improving, is still less than half the volume that it was at that time.
In 2007, U.S. CMBS issuance reached $230 billion. Last year, CMBS shops securitized $94.1 billion in commercial mortgages and that volume is forecast to climb to $124 billion this year, according to Commercial Mortgage Alert.
Borrowers are benefiting from the heightened competition, but certainty of execution is suffering for those borrowers that opt for less established lenders. The smaller shops can’t sell their loans to borrowers on reputation alone. They need something that sets them apart in a very competitive market. If they don’t have the track record or a name that borrowers recognize, one of the only ways to compete is on price and terms, says Gortikov.
The problem is that CMBS is a highly commoditized market, with all lenders selling the same product, and small shops lack the pricing power of the bigger players. The top five CMBS lenders—Deutsche Bank, J.P. Morgan, Wells Fargo, CCRE and Bank of America—accounted for nearly half of all conduit loans made last year. The bottom 20 firms accounted for less than 8 percent of CMBS loans last year.
If the 31st lender on the list is able to offer better terms than a lender that is perhaps among the top 10—somebody is wrong, says Gortikov. While the borrower may be getting better terms, better spreads and less structure, the probability of that loan actually closing and being securitized without issues is uncertain, he says. And failure to close can be a lot more expensive to a borrower than the few points saved going with a smaller lender.
“I do think it’s a great time to be a borrower. There is a tremendous amount of liquidity out there,” says Nalbandian. “It will be interesting to see with the increased competition, how far lenders will be willing to push the underwriting envelope.”
Lenders are bidding more aggressively for deals, which is thinning their profit margins. Ultimately, there is only so much business to go around, and this may be a disincentive for new lenders with no real track record or pricing efficiencies to enter the market.