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NATIONAL ASSOCIATION OF REAL ESTATE INVESTMENT MANAGERS 42 NAREIM FEWER INVESTORS One reason that CMBS issuers must be more responsive to the demands of investors is that the number of buyers of the triple-A rated classes has declined in recent years. There are several theories as to why. The most common is the reduction in liquidity brought about by the implementation of Basel regulations and the Volker rule that constrains proprietary trading and makes it more expensive for banks to hold bonds. Banks can buy CMBS to support the market, as opposed to making profits, but there are fewer willing to serve that function, and the resulting loss of liquidity has led to the exit of some investors. Industry trade groups are lobbying to reform or repeal the Volker Rule, and the Office of the Comptroller of the Currency asked for comments on the rules during the summer, so relief for banks could be coming. Yet it's hard to say when the relief will come or even how quickly banks will go back to the old ways of doing business, as trading is a risky business. Another reason the buyer base is smaller is that fast- money investors such as hedge funds have virtually disappeared, leaving the triple-A investor base concentrated in cash or low-leverage buyers. Hedge funds are shrinking as investors redeem capital owing to poor performance, and other fast-money players dropped out as banks stopped financing the purchase of bonds in the wake of the financial crisis. So buyers of senior bonds tend to be institutions that want less risk and are not shy about expressing those needs to issuers. COMPETITIVE LANDSCAPE CHANGING CMBS loans originated to withstand more stress is largely a virtue, but there are consequences. Some worry that the market's focus on better quality product may reduce availability of debt for marginal assets. Throughout its history, CMBS has been the lender of choice for properties in secondary and tertiary markets, and for B- and C-quality assets. CMBS remains most competitive by providing more proceeds and longer terms than competitors. Commercial banks typically don't push terms longer than seven years, giving CMBS an advantage for 10-year loans. Life companies dominate the market for low-leverage loans on high-quality properties, because they can offer lower loan spreads and borrowers prefer the more personalized servicing that insurers provide compared to CMBS. "A life company will always take down a loan if they want it, that hasn't changed," said one mortgage broker. Source: Commercial Mortgage Alert Source: Commercial Mortgage Alert