Could Volatility And Shake-Ups In The CMBS Market Lead To Greater Opportunity?

When 2015 turned into 2016, it was clear the CMBS market was radically shifting, with longer loans, a flood of new lenders, a more powerful Fannie and Freddie and a wave of CMBS loans that are coming up for refinancing in the next few months. There were a lot of questions still in the air.

But, after a volatile Q1, have any of these questions been answered? We spoke to the CMBS team at Walker & Dunlop, including CEO Robert Restrick (center), CMBS platform managing director Geoff Smith (right) and new managing director Mitch Resnick (left), an industry veteran who was recently hired by Walker & Dunlop after stints at Freddie Mac and Goldman Sachs.

After working with Walker & Dunlop on over $13B of loans into Freddie Mac's K-Series securitizations, Mitch will now oversee Walker & Dunlop Commercial Property Funding’s capital markets executions, pricing, hedging, securitizations and investor relations. So we felt he and the Walker & Dunlop team were the perfect sources for some proper insight and answers.

Bisnow: How would you describe the current environment for commercial real estate finance? 

Robert Restrick: CMBS aside, all areas of commercial real estate lending are firing on all cylinders in the global search for yield and fundamentals are remaining sound. With respect to the CMBS market, volatility—while currently tempered to some degree—continues to play a significant role. From our perspective, volatility creates opportunity and we intend on continuing to be a source of reliable capital for our clients. 

Bisnow: What are the biggest issues causing this CMBS volatility? 

Robert: Besides the macro pressures on CMBS technicals, the greatest challenge impacting the industry is regulation and, in particular, the implementation of Risk Retention, which becomes effective at the end of this year. This will most likely lead to consolidation within the industry and we expect to be a beneficiary as we continue to expand our platform.

Bisnow: You said that the market volatility is creating opportunities in the industry. What opportunities are emerging? 

Robert: The changing CMBS landscape should create many opportunities. As a CMBS survivor, we’ll continue to attract superior talent to our platform as it continues to expand. There’s a tremendous need for the CMBS market to exist as a source of financing, and the greatest change that the new regulations will bring is the creation of longer-term alignment amongst lenders, borrowers and investors. New loans will reflect the demand for better credit quality and more comprehensive underwriting. 

Bisnow: Where are the gaps in the market?

Geoff Smith: The gap (and therefore potential) in the market will be in the mezzanine investment space. Historically, CMBS has been the source of capital for secondary and tertiary markets at higher leverage, as opposed to trophy assets in gateway markets. The pressure to right-size new loans and enhance credit quality will increase the demand for extra leverage outside of CMBS. This sector doesn’t fall under risk retention, and higher yielding capital will step in to fill this gap. 

Bisnow: What economic factors are affecting the loan terms and the amount of loans being taking out these days? 

Geoff: The commercial lending markets generally offers two kinds of products: short-term floating rate loans and longer-term fixed rate loans. In general, floating rate loans offer prepay flexibility and are for properties and borrowers who are in the process of executing their business plan. The intent is to stabilize the property, increasing occupancy, completing renovations, etc., and then taking out longer-term debt to maximize their investment over a longer period of time. The fixed rate market therefore is generally for stabilized properties. 

Bisnow: 2007 was a massive year for CMBS loans, and many of those 10-year loans are coming up for refinancing. What do borrowers and lenders have to think about when getting these loans refinanced? 

Geoff: The wall of maturities that everyone’s been talking about will really start kicking in towards the end of this year. While some loans are readily refinancible in today's credit and rate environment, a decent amount of these will need to be right-sized. This will result in the need for more equity and mezzanine debt to secure financing, creating more lending opportunities. 

Bisnow: There are a lot more players in the CMBS field these days. How does that affect the spreads and the CMBS loans you offer or are seeing? Is this glut of competition weakening loans as a whole?

Robert: The glut of lenders is quickly shrinking. The market volatility of the first quarter has sidelined many lenders and taken several out. Coupled with the pending risk retention, the field of lenders will continue to shrink. The remaining players will be larger commercial banks and non-bank financial companies that serve the commercial real estate market. We intend to make the most of this opportunity. 

Bisnow: How do you think Freddie and Fannie's role in the market will evolve over the next few years? They're stepping up their game in the small balance loan market, but are they someone who's playing a major role in the CMBS field? Will that role only continue to grow?

Mitch Resnick: Both Freddie Mac and Fannie Mae now account for over a third of the lending market, but multifamily is only one type of commercial real estate they finance, so it’s not tremendously impactful to the CMBS market. We expect Walker & Dunlop to continue to provide the government-sponsored entities with ample product that fits their guidelines. 

Bisnow: Mitch, how do you think your time at Freddie Mac, working on their K-series, helped you gain a better grip on working with Walker & Dunlop's products and clients? As an expert in securitization, what processes or philosophies are you bringing with you to fine-tune W&D's offerings?  

Mitch: Working at Freddie Mac was extremely valuable in getting exposure to the multifamily owners across the country. Service after the sale is critical in this arena; there’s such a thing as customer loyalty in the lending universe. Another key element of the Freddie Mac platform is the quality of the underwriting, as it is in the Walker & Dunlop platform. 

Bisnow: Walker & Dunlop offers loans on every major asset class. Is there a particular area of focus or where you see more flow or opportunities? 

Robert: We see and execute opportunities across all asset types. However, our strength as a premier agency multifamily lender provides us with unique opportunities relative to our competition on multifamily. Across all the major food groups, we are constantly providing unique financing solutions to all our clients. 

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