The commercial mortgage market is booming, having experienced some of the most favorable lending conditions since 2008, The Wall Street Journal reported Nov. 20. The market likely will see $46 billion of new mortgage issues by the end of the year, and as much as $65 billion in 2013.
The market also is experiencing an increase in the availability of mezzanine debt, something that has been even rarer than commercial mortgage-backed securities, the Journal reported. Mezzanine debt is a subordinated debt or preferred equity instrument that represents a claim on a company's assets and is senior only to that of common shares.
With greater financing availability, borrowers are obtaining much needed capital while benefiting from lower interest rates. The Journal reported that the rate on recent CMBS issues has been as low as 0.83 percentage points over interest rates swaps — the lowest since 2007 and down from 1.6 points earlier this year.
With lower interest rate refinancing opportunities, many borrowers have been taking cash out of their properties. Centerbridge Partners, Paulson & Co. and Blackstone Group, owners of hotel chain Extended Stay America, are looking to borrow $3.5 billion by selling CMBS and mezzanine debt with the hope of pocketing $700 million of the proceeds and using the rest to replace existing debt. And Cerberus Capital Management shored up its balance sheet by taking out a $1.8 billion loan to refinance hotels in Hawaii and San Francisco. The deal included mezzanine debt as well as a senior mortgage, the Journal reported.
A year ago, there was concern about the availability of refinancing for commercial mortgages. Investors were facing $41 billion of CMBS scheduled to mature in 2012 and $30 billion in 2013. However, the easing of credit and less-than-anticipated defaults and foreclosures have opened up the market. However, some analysts expressed concern that the expansion of mezzanine debt can raise loan-to-value ratios to unhealthy levels, the Journal reported.