Newmark Refinances Former CMBS Loan, CMBS Issuance Down

Newmark arranged a $15M cash-out refinance loan on the 153K SF two-building Embarcadero Business Park in Oakland in February. The previous CMBS loan had reached maturity and was refinanced with a five-year fixed-rate loan with a regional bank made on behalf of a local borrower. The business park is a leasehold interest with a local government tenant occupying the majority of the space.

“This was an incredibly challenging loan to execute due to the nature of the ground lease, the major tenant negotiating a lease extension, and an existing CMBS loan maturity,” said Newmark vice president Darren Pacheco, who arranged the loan. “Capital markets have been turbulent as interest rates have risen rapidly. In the end the borrower was pleased with a loan that met all their objectives.”

The CMBS market could no longer benefit the Oakland borrower and a bank ended up taking on the loan instead. This type of refinancing is becoming more common, especially with CMBS loan issuance down in the last year. CMBS loan issuance decreased about 30% last year to over $67B compared to $95.1B of issuance in 2015, according to Trepp. Over $87B of CMBS loans originated in 2006, meaning the notes in 2016 either defaulted or used other financial sources.

“CMBS loans are getting done, but it’s just a very cumbersome process and can be a challenge relative to other capital sources,” Newmark chief financial officer and principal Mike Heagerty said.

Borrowers, especially those who received poor services in the past or had problems with CMBS loans, are more sophisticated and are asking more about who is servicing a loan for the 10 years.

Newmark is still trying to place CMBS loans and staying involved in the transaction to improve the service experience for the borrower.

Heagerty said now is a good time to refinance because the bigger concern is rising interest rates, which could impact the underlying income of a property owner including rent and occupancy as well as commercial real estate transactions.

Properties with a good tenant mix are more favorable and likely to get refinanced. Lenders and capital markets from other parts of the country are looking for opportunities in Northern California. They cannot find enough loans or mortgages in other places because employment is not as good and they want to fill their buckets with other markets, according to Heagerty.

Heagerty still sees value in the CMBS market even with many turning away from this option.

“It’s an inherently good structure and you have to be able to ask for the right things and it’s more user-friendly,” he said. “You do that through education and being able to have the right advocates.”

Newmark is working to get its producers to teach clients about CMBS, how tranches work, why there are so many different parties in a transaction and the obstacles of locking in rates.

“We want CMBS to be a strong alternative to other sources of capital,” Heagerty said. “Alternative lenders won’t always be there.”