The New CMBS

The slumbering giant of commercial mortgage securitization has been roused. Five months after the formal expansion of the Term Asset-Backed Securities Loan Facility, or TALF, to commercial mortgage-backed securities in June, the Federal Reserve Bank of New York announced last week that it had received its first requests for loans in support of new CMBS investment. Absent any new deals in the marketplace, loan requests up to now have been limited to credit in support of investment in older, legacy CMBS issues.

The first funding requests for new CMBS coincide with the pricing of series 2009-DDR1 certificates, a single-borrower, single-loan transaction brought forth earlier this month by Goldman Sachs Commercial Mortgage Capital. Details of a second deal became public last Thursday when Bank of America announced a $460 million CMBS issue, denoted 2009-FDG. Like DDR1, the Bank of America issue is purported to be a single-borrower, single-loan transaction secured principally by 44 office and industrial properties owned by Fortress Investment Group. While DDR1 qualified for TALF, Reuters and The Wall Street Journal have reported that the Bank of America deal will not be eligible.

The TALF funding requests for new CMBS, totaling $72.2 million, are a modest sum compared to legacy CMBS requests that have run into the billions of dollars since the New York Fed’s window expanded in July to include legacy issuance. Still, as the first new issue under the auspices of TALF, DDR1 has been received with cautious optimism in a market thirsty for new sources of credit. At a minimum, TALF is no longer terra incognita for other REITs planning the foray. As far as implications for broader liquidity, the market has been more reserved in its assessment of DDR1. In fact, spreads on AAA-rated CMBS widened after the deal’s announcement, rising by approximately 25 basis points before falling back last week.

While some market participants have hailed the new deal as a harbinger of robust securitization activity in the coming months, the implications of forthcoming deals for the broader commercial real estate credit market are not as clear as the current enthusiasm suggests.

In key respects, DDR1 is unlike the CMBS that the market had grown accustomed to before the downturn. It is of no surprise that the deal’s underwriting is markedly more conservative than its antecedents. But at the same time, the parties to the transaction and the underlying debt itself are somewhat removed from the locus of the commercial real estate credit crisis. DDR1 is by no means the perfect borrower: Its issuer debt rating was downgraded by Fitch to BB with a negative outlook in May. Still, DDR1 succeeds precisely because it does not overlap with or directly address the most pressing challenges in today’s financing market. Nor does its structure countenance the full extent of agency and information asymmetry failures that still sully investors’ appetite for fusion CMBS.