Commercial mortgage backed securities doubled in '93

Real Estate Weekly, April 20, 1994

With a powerful surge of activity in the second half of 1993, the private sector doubled its volume of commercial mortgage-backed securities (CMBS) issues last year, assuming almost total dominance of a market that once was chiefly the domain of the Resolution Trust Corporation (RTC).

That's the finding of the Income Property Securitization Survey conducted by the national accounting firm of Kenneth Leventhal & Company (KLCO).

"The emergence of financial institutions and real estate investment trusts (REITs) as major issuers late in the year helped push private-sector volume to $14.5 billion, or 84 percent of the total volume of $17.2 billion," said Carl Kane, a managing director in KLCO's New York office. In 1992, non-RTC transactions accounted for only $7.5 billion, or 45 percent, of the $16.6 billion total.

"Even more significant than gains in volume is the growth we are seeing both in the types of issuers and the types of property being securitized," said Kane, who headed the study team. "The market has deepened substantially in a very short time."

Based on this trend, Kane conservatively forecasts at least $18 billion in non-RTC securitizations for the current year. Mortgage conduits are likely to be the fastest growing market component on a percentage basis, he adds. The conduits are created to pool small loans and package them securities for sale to investors.

The Leventhal study shows that while traditional real estate owners and developers securitized $6.4 billion of assets last year, they accounted for only 44 percent of the private-sector total. REITs and a broad range of financial institutions represented the remaining $8.1 billion of volume.

Insurance companies alone were responsible for $3.1 billion, or 22 percent, of non-RTC activity (up from only 3 percent in 1992). "Regulatory pressures are likely to encourage an acceleration in mortgage-backed bond issues by insurers because securitized debt offers significant advantages in risk-based capital requirements over whole loans," Kane said.

REITs emerged as significant participants in the latter half of last year, accounting for slightly more than $2 billion, or 14 percent, of private-sector volume. Kane said REITs, which issued no mortgage-backed securities prior to 1993, are finding the costs of raising capital in the CMBs market highly competitive.

"Mortgage conduits are the next largest factor in the non-RTC market, with more than $1.2 billion, or 9 percent, of volume last year," he pointed out, adding "That amount significantly understates the conduits' activity in 1993, as many funded conduit loans were not yet securitized by year end.

Conduit volume for 1994 is projected at $4 to $5 billion by KLCO, which would give conduits roughly 25 percent of the private-sector market.

Commercial and investment banks accounted for almost all of the remainder of non-RTC volume last year, issuing some $1.6 billion of bonds.

Among other significant points revealed in the Leventhal study:

* More non-RTC bond issues (30) were secured with retail property assets than with any other type of assets last year. However, in terms of dollar volume, mixed-use properties led the way with $5.2 billion, followed by retail $3.3 billion), multifamily ($3 billion) and office ($1.2 billion). All other property types amounted to a total of about $1.8 billion.

In 1992, multi-family led both in number of transactions (20) and dollar volume ($1.4 billion).

* Based on dollar volume, slightly less than half of the non-RTC deals last year were offered to the public. Fifty-three percent were sold in private placements.

* Goldman Sachs widened its lead as the dominant underwriter in the CMBS market, representing 32 percent of the dollar volume in non-RTC transactions last year, compared with 23 percent in 1992. Merrill Lynch moved into second place with 15 percent, passing Kidder Peabody and Lehman Brothers.

The Kenneth Leventhal Income-Property Securitization Survey covers all rated transactions - both publicly and privately offered - completed by private-sector and government issuers. Copies of the survey are available on request from the firm's offices around the nation.