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Roddy O’Neal: Annual CMBS Issuance Won’t Reach $60 Billion Until At Least 2012

Any projection calling for annual domestic commercial mortgage-backed securities (CMBS) issuance to reach $60 billion this year is unrealistic, said Roddy O’Neal, CEO of Goldman Sachs Commercial Mortgage Capital, during Monday’s retail trends panel at RECon 2011.

A relatively thin pool of B-piece buyers — those willing to buy the non-investment grade portions of the loans — will limit total domestic issuance to between $35 and $40 billion, O’Neal believes. Still, that would be a big jump from the $11.7 billion of securitized loans in 2010. The record for domestic CMBS issuance was $230.2 billion in 2007.

“The B-piece market — those that buy the non-investment grade bonds that take the first-loss position — is a little bit shallow right now because we’re not able to get the [high] returns that would drive some of the opportunity funds to buy those bonds,” emphasized O’Neal, during the panel discussion moderated by Marcus & Millichap at the Renaissance Hotel.

“The challenge for us is to find the product that fits,” he continued. “There is ample investor demand out in the marketplace to buy the newly created [investment-grade] bonds.”

Regardless, O’Neal believes the recovery in the CMBS market that has taken hold over the past two years is sustainable. “When we get into 2012 and 2013, when a lot of the loan maturities are coming, we may see it get to be a $60 billion to $65 billion industry again.”

Matter of opinion

Jones Lang LaSalle reports $9 billion of CMBS issuance occurred during the first four months of 2011. The brokerage giant predicts $40 billion by the end of the year. Moody’s Investors Services projects $37 billion in total issuance for 2011. But industry reports fluctuate wildly, with some suggesting that CMBS issuance could reach $60 billion this year.

Money managers are turning to commercial mortgage debt as relative yields on investment-grade corporate debt have declined between 17 basis points and 149 basis points since Dec. 31, according to Bank of America Merrill Lynch index data and Bloomberg News.

Meanwhile, spreads have been tightening in the institutional-grade tranches of CMBS as investor fears subside. The extra yield investors demand to hold top-rated securities linked to commercial real estate has declined to 187 basis points, or 1.87% more than Treasuries, from 228 basis points at year’s end, according to a Barclays Plc index and Bloomberg News.

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