• Real Estate: Harnessing the Power of CMBS
  • April 27, 2004 | Author: Charles T. Marshall
  • Law Firm: Andrews Kurth LLP - Dallas Office
  • When Wall Street puts its muscle behind a product, tremendous growth often follows. Real estate industry players are witnessing -- and benefiting from -- this phenomenon with the explosion in commercial mortgage-backed securities (CMBS). Through these vehicles, the capital markets now play a critical role in real estate financing, a trend that is forecasted to increase further over the next few years.

    Developed during the early 1990s, CMBS loans, also known as conduit loans, were originally rather inflexible, narrow-purpose loans that didn't always meet the needs of real estate operators. Beginning with the real estate boom of the late 1990s, with its tremendous need for capital, Wall Street has evolved conduits into products whose only limitations are the creativity of investment bankers and the appetite of CMBS investors. The timing was right. Previously, real estate owners had relied on local banks and life insurance companies for financing. With the savings & loan crisis, these capital sources disappeared or were sharply reduced and CMBS stepped into the void. Now, even the industry's most significant players -- including national real estate investment trusts (REITs) -- rely on CMBS financing.

    CMBS should be considered a significant weapon in the arsenal of any corporate real estate owner -- not just industry players. Corporations can take their real estate -- a non-cash-flow asset -- and turn it into a significant source of capital with sale-leaseback and other structures which create securitizable cash flow. Even during the recent downturn in the equity markets, the volume of CMBS issuances has steadily increased, confirming its reliability as an ongoing source of capital.