“It’s just starting to happen. And that’s a better thing for the borrower, but the borrower still needs to be prepared to come in with fresh equity and participate in this adventure.”
– Michael Cohen, Brighton Capital Advisors
The markets for both have pretty much collapsed in recent months, with defaults a particular threat to CRE overall
If someone working in commercial real estate finance had fallen asleep in September 2019, a la Rip Van Winkle, they might have woken up assuming that two of the staid pillars of lending — commercial mortgage-backed securities (CMBS) and collateralized loan obligations (CLOs) — were as solid and useful as they had been the night they turned in.
Alas, like Van Winkle’s rude awakening, they will shortly learn it’s a different America.
While commercial lending has been relatively diminished since the regional banking crisis of this past spring, with alternative lenders and life insurance companies carefully picking their spots as the banks sit on the sidelines, the markets for CMBS and CLOs have almost completely collapsed — and that’s putting it politely.
Private label CMBS and CLO issuance has declined by more than two-thirds in just the last year from $92.3 billion in September 2022 to $30.7 billion in September 2023, according to the Commercial Real Estate Finance Council (CREFC). Conduit CMBS — multi-asset, multi-borrower loans — issuance is down 27 percent on the year, while SASB CMBS — single-asset, single-borrower loans — has declined a whopping 73 percent.
[…]
There are some crafty solutions to the problems inherent in CMBS workouts.
Michael Cohen, managing partner at Brighton Capital Advisors, has 26 years of experience in the CMBS space. He said that lenders are now doing more loan extensions with modified A-B note structures, where, for example, a $100 million loan is modified down to $70 million, it’s restructured and extended, and the $30 million in the B piece will accrue interest for the lender on the backside. But that $70 million A note that’s been restructured is also bringing in new equity partners to be the primary borrower, who are attracted to the restructured loan on a longer timeline.
“It’s just starting to happen,” said Cohen. “And that’s a better thing for the borrower, but the borrower still needs to be prepared to come in with fresh equity and participate in this adventure.”
