The government-sponsored enterprise portion of the securitized commercial/multifamily market has been hot since the downturn and has come to dominate it, somewhat as like it has in the single-family market. So it is among the factors decision-makers need to consider in drawing up GSE reform and as the CMBS market makes a comeback.
As Standard & Poor's head of structured finance, Howard Esaki, noted in a podcast last month: while commercial mortgage-backed securities issuance, including multifamily, has slowed a little bit at times it generally has been ahead of last year's pace.
The agencies' influence in that market has gone from a situation where they, at most, represented about 10% of it through 2007, to a point where as of 2009 and 2010 they represented around 70% to 80%, said S&P senior director James Manzi.
"One of the bright spots in CMBS this year has been the recent rise of agency CMBS," Esaki said.
"I think a lot of it is that the multifamily bid has come back," said Manzi. "These deals are mostly and sometimes almost exclusively multifamily."
When asked about underwriting, Manzi said, "From the issuer provided data, we see generally strong coverages and LTVs."
He also noted that in Freddie Mac deals, unlike most other conduit CMBS deals, there appears to be a trend toward more conservative underwriting from 2010 to 2011. During that time in those deals, coverage has gone up and leverage has gone down a little bit, Manzi said.
When asked about performance, Manzi said, "Fannie Mae and Freddie delinquency numbers are well below what we see in CMBS."
He said when it comes to property quality in CMBS, properties in agency deals are generally "class A quality" and "class B and C" in other securitized commercial mortgage product. Manzi said he thinks the properties also tend to be in better locations for the Fannie and Freddie product.
But will this relative, multifamily-based strength in the agency sector persist?
When asked about the outlook for the fundamentals in the multifamily sector overall, Manzi said, "We tend to see modest construction. The housing market is still pretty weak and favorable demographic trends I think all point to continued strength in the apartment sector."
He noted that CB Richard Ellis data reports for the next three years indicate rising effective rents and falling vacancies, but "the recovery may not be as beneficial for the class B & C properties that you see in CMBS."
In a report last week, Tom Jaros, a real estate partner with the Chicago law firm Levenfeld Pearlstein, said he believes that in general CMBS lenders have improved their loan documents and addressed operational issues that caused problems prior to the downturn, perhaps most significantly when it comes to recourse. He said some lenders are still marketing loans as nonrecourse, but they have recourse carve-outs that put them in a better position to control workouts.
Some experts expect the CMBS market to reach $50 billion by the end of 2011, said Jaros. But other experts have lower estimates.
