Manatt Partner Discusses Dip in Commercial Mortgage-Backed Securities Lending

“Real Estate Financing Shifts Again”
Daily Journal 

November 18, 2011 – Manatt’s Adam R. Salis, a partner in the firm’s Real Estate & Land Use Practice Group, discussed with the Daily Journal the factors contributing to a recent decline in commercial mortgage-backed securities (CMBS) lending in real estate.

According to the Daily Journal, real estate finance attorneys and analysts were optimistic in the beginning of 2011 when the market and CMBS lending activity picked up. Analysts were expecting a big comeback, predicting loan originations would exceed $40 billion by the end of the year, compared to the roughly $10 billion of CMBS issuances in 2010. In up economies, CMBS loans have drawn borrowers because they offer lower interest rates than traditional financing sources, and they appeal to banks and other lenders due to quick loan fees.

In late July, however, the market once again crashed, and CMBS lending went with it. Observers suggest the slowdown was caused partially by a failed $1.48 billion transaction from Goldman Sachs Group Inc. and Citigroup Inc., making investors nervous to pursue CMBS. Uncertainty in the European financial sector may also be a factor in the CMBS decline.

“The markets have become so interconnected globally,” said Salis, who added that his borrower clients are increasingly seeking financing through commercial banks rather than pursuing CMBS lending.

“Since CMBS interest rates were so much lower [than banks’], borrowers were willing to live with many other provisions that came with CMBS lending,” he said. “But now that gap has disappeared. Banks are stepping into the breach, and CMBS originators are sitting on the sidelines.”