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Now, the country’s top 50 metropolitan statistical areas (MSAs) are most desirable, and other markets are on the fringe. This centralizes where the loans are being securitized and addresses concerns that there have been disproportionately more defaults on loans with collateral in secondary and tertiary markets.
Loans in densely populated areas are showing aggressive competition on price, and these geographic concentrations will be reflected in new multi-issue deals coming to market.
Collateral in first-tier markets with stronger, diverse economic fundamentals and accepted property types have the best shot at being financed and sold in the CMBS market today. Investors will entertain loans in secondary and tertiary markets across the country — many of which are by no means small — but in most cases, the collateral must be the most commanding property of its type in the MSA. Without that moniker, there is no plan B.
3. Loan size
Loans currently being financed are averaging $10 million and greater. Groupings of smaller, cross-collateralized loans that aggregate to larger combined totals are the exception.
Larger loans go to market faster in a re-emerging environment in which multiple new capital sources vie for market share. Larger loans also infer a label of higher-quality assets in larger markets. This implies better credit quality.
What is being overlooked, though, is the protection offered investors through diversification and granularity of assets. Previously, the market rewarded pools that either matched large, “trophy property” loans with dozens or even hundreds of smaller-balance loans or that were composed solely of the smaller-balance assets. Indeed, there was a thriving market for pools of loans comprising only loans less than $2 million.
Investors likely will quickly return to the theory of portfolio diversification.
Most aspects of underwriting today — cash equity and restrictions on cash-out, loan-to-value (LTV) and debt-service-coverage ratios (DSCRs) — are more conservative than before. This is evident in the newfound focus on debt yield, a second cousin to DSCRs and the one metric the market employs to compare property leverage to cash-flow strength.
As would be expected coming out of a severe crisis in value deterioration, lower leverage is a key attribute of today’s CMBS market. For most property types, a 75-percent LTV is at the top end, with CMBS pools still targeting in the low-60s for a weighted average. A recent issue, for example, had a weighted average of 53-percent LTV and 1.88 DSCR — results that are more conservative than in the previous market.
Amortization is topping out at a comfort level of 25 years — in some cases, it may be 30 years on multifamily and the best-quality commercial properties. Interest-only is only a memory relative to the height of the market in ’07, when easily 30 percent to 40 percent of loans had some interest-only component.
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