CMBS OUTLOOK:
2013 AND BEYOND
18th Annual Fisher Center Real Estate Conference
Session 5: Real Estate Finance
1
A Brief History of CMBS
Agency and Private-Label CM BS New Issue Volum es
250
228
Private-Label CMBS
200
198
Agency CMBS
Issuance ($BB)
167
150
93
100
74
57
50
78
68
37
72
60
48 48
51
47
2
3
34 33
27
26
16
2
3
2
1
5
6
8
6
5
7
16
3
4
94
12
-
Source: Jefferies & Co., Commercial Mortgage Alert * Projected
2
3
CMBS Spread Projections in 2013
CMBS spreads will continue to decline in 2013, although at a slower pace than in 2012, due to:
– Historically low rates
– Technicals:

Reduced securitized products

Run off in CMBS
– Improving CRE fundamentals
– Relative value vs. competing sectors
– More readily available leverage
– Continued tame spread volatility
3
3
CMBS Conduit Lender Competitiveness Growing

Wider/volatile CMBS spreads and ineffective loan
pipeline hedging tools drove up conduit loan rates
during 2H11
Life Company Vs. CMBS Commercial/ Multifamily
Mortgage Commitments and Contract Interest Rates
(2000-2012)
via a higher rate to absorb the spread volatility
– Reduced volatility and strong demand for
high-grade risk assets yielded tighter CMBS
spreads and sharply lower mortgage rates in
2012

Conduit mortgage rates closing in on portfolio lender
rates, but can’t touch the GSEs
– Conduit rates of 3.90% to 4.50%
– Life Co. rates of 3.50% to 4.50%
– Regional bank rates of around 5.00%
Amount Committed ($B)
– Only effective hedge was building in cushion
250
9.00
200
8.00
150
7.00
100
6.00
50
5.00
-
4.00
Life Co. Amt. ($B)
CMBS Amt. ($B)
Life Company Rate (%)
CMBS Mortgage Rate (%)
Source. ACLI, Jefferies & Co. Note: No CMBS data in late-08 through YE09. * Annualized 2012
4
3
CMBS Issuance Volumes Show Slow But Consistent Annual Growth
2007: $228 Billion Total Issuance

64 Fixed-rate Conduit CMBS – $192b

2 Single-borrower CMBS – $11b

New Issue CMBS by Deal Type
60
13 Floating-rate CMBS - $20.8b
-----------------------------------------------------------------------------------------
Other
2009: $2.74 Billion Total Issuance
50
Floaters

3 Single-Borrower CMBS – 144(a)
Single Borrower

2 Private Freddie K CMBS
Conduit/Fusion
40
2010: $11.6 Billion Total Issuance

7 Conduit CMBS – 144(a)

4 Single-borrower /Other CMBS – 144(a)

5 Private Freddie K CMBS
-----------------------------------------------------------------------------------------
Issuance ($B)
-----------------------------------------------------------------------------------------
30
20
2011: $32.2 Billion Total Issuance

18 Fixed-rate Conduit CMBS – Public, 144(a)

8 Single-borrower /CMBS – Private 144(a)

11 Private Freddie K CMBS
-----------------------------------------------------------------------------------------
YTD 2012: $48.0 Billion Total Issuance

27 Fixed-rate Conduit CMBS – Public, 144(a) - $32b

21 Single-borrower /CMBS – Private 144(a) - $10.1b

16 Private Freddie K CMBS - $3.3b

3 Non-Performing CMBS – Private 144(a) - $486mm
10
0
Source: Jefferies & Co., CM Alert
5
3
CMBS Volume Projections in 2013
CMBS Volume will exceed $70mm in 2013, due to:

More competitive CMBS spreads relative to bank and life company lenders

High levels of debt and equity capital

Increasing property transactions

Growing pool of refinanceable loans, particularly given outlook for historically low
mortgage rates

Increasingly aggressive first mortgage underwriting

Expanding subordinate debt markets
6
3
Rising Debt and Equity Capital for CRE: Transaction Volume Up from the Trough
CRE Property Transaction Volume
600
513
Sales Volume ($B)
500
354
308
400
300
300
207
200
100
79
102122
180
123
139
60
0
Source. RCA *Est.
7
CMBS 3.0 – Increasing Leverage As Per the Rating Agencies
Fixed-Rate Conduit/ Fusion CMBS Stressed LTV (%)
120
100
80
60
Source: Jefferies & Co. * YTD 2012 Data
1.40
Fixed-Rate Conduit/ Fusion Stressed DSCRs
1.20
1.00
0.80
Source: Jefferies & Co. * YTD 2012 Data
8
CMBS Maturities Level Off in 2013 and 2014 Before Heading Into the Wall
Fixed-Rate Conduit/Fusion Maturity Schedule
(Excludes Defeased Loans)
7,500
140
Ou tstan din g
Balan ce ( $B)
Lo an Cou n t
5,000
2,500
120
100
80
60
40
20
-
Loan Curr. Bal. ($B)
Loan Count
10,000
0
Source: Jefferies & Co. Excluding Defeased Loans. *as of 11/12
9
Ability to Refinance Depends on Vintage/Seasoning

Majority of loans maturing in ‘13 originated in ‘03 and
’04
Fixed Rate Coupons and Capitalization Rates by Vintage
Avg.
Avg. Loan
Coupon Avg. Cap

‘03 loans are structurally more sound, but adverse
selection issues weigh on outlook
– Amortizing
– Higher loan coupons at origination than today
– Higher cap rates at origination and thus equity
build-up as cap rates lower today

$18B of fixed rate 10-year ‘03 vintage loans to mature
in ’13

$6.2B of fixed rate 9/10-year ‘04 vintage loans to
mature in ‘13
Vintage
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
(%)
8.25
7.99
9.48
8.20
7.19
6.14
6.18
6.03
6.67
8.51
8.62
NA
5.83
6.36
5.77
Rate (%)
8.56
8.45
8.64
8.41
7.98
7.67
7.25
6.79
6.36
5.74
5.36
6.72
6.20
5.82
4.26
Spread
(BPs)
300
234
233
238
202
173
149
130
135
328
438
NA
258
246
272
Avg. 10
Avg. Pool Swap Rate
LTV (%)
69.3
69.2
69.4
68.7
68.9
66.8
68.9
68.7
68.0
69.1
(%)
5.25
5.64
7.15
5.82
5.17
4.41
4.69
4.73
5.32
5.24
66.8
57.9
63.9
62.1
4.24
3.44
3.25
3.90
3.05
Sources: Jefferies, Trepp, NCREIF. *Across all property types.
10
3
CRE Values Remain Depressed Nationally, But Many MSAs in Recovery Mode

Commercial Property Prices (as of 10/12)
– Lower by 22% from 10/07 peak
– Declines vary by asset type/quality/location

By Property (peak thru 10/12)
– Retail: -35%
– Office: -25%
– Industrial: -23%
Commercial Real Estate Values Past the Trough (as of 10/12)
200
175
150
125
100
75
Source. Moody's Investors Service, S&P
– Multifamily: -12%

But Recovery Well Underway
– National all-property composite has regained 43% of its
peak-to-trough loss

Core MSAs in Full Recovery, Non Major MSAs Lag
– Non-major markets recovered 27% of peak-to-trough loss
– Major markets recovered 65% of loss
National CPPI
CPPI by Property Type: 2008 vs. 2012
10/31/08
200.00
159.02164.19
10/31/12
162.27
161.24
154.72
160.00
123.51
131.83
141.97
120.00
80.00
40.00
0.00
Source: Moody' s/REAL CPPI
11
3
Improving Commercial Real Estate Valuations– An Uneven Recovery
Moody' s/REAL CPPI by Property Type
Moody' s/REAL CPPI by Major/Non -Major Markets vs.
National
225
225
Major Mkts.
200
175
Non-Major
Mkts.
National
Office
200
175
Industrial
Retail
Apartment
150
150
125
125
100
100
75
75
Source. Moody' s, * as of 10/12.
Source. Moody's Investors Service
Source. Moody' s, * as of 10/12.
Source. Moody's Investors Service
12
CRE Supply Technicals Bode Well for Valuations
National Net Completion Data for Multifamily and
Hotels
2,200
300
National Net Completion (SF) for Retail, Office and
Industrial Properties
300,000
HT
RT
250,000
OF
MF
2,150
200
200,000
Units (x1000)
Net Completion (SFx 1000)
IN
150,000
100,000
Rooms (x1000)
2,100
100
2,000
50,000
-
Source. CB Richard Ellis
2,050
1,950
-
Source. CB Richard Ellis

Retail: Completion taking further dip

Office: Completion dip surpassed the previous lows of 1994 and 2004

Industrial: Showing similar trend to office with triple dips at 1993, 2003 and now 2012

Hotels: Showing a great pick-up in completions, at the peak currently

Apartments: lowest completions since 1994
13
Important Disclosures
This material is provided for informational purposes only and is intended solely for your use. It may not be quoted, circulated or otherwise referred to
without our express consent. This material is a product of Jefferies & Company, Inc. (“Jefferies”) trading and sales desk personnel. This material is
not a research report and the commentary contained herein may contain views that differ from the Jefferies Fixed Income Research Department.
Jefferies may have accumulated a long or short position in the subject security or securities or in related financial instruments on the basis of this
analysis prior to its dissemination. All prices, yields, estimates and opinions expressed are indicative only and are subject to change without notice.
This material is based on sources that we believe to be reliable, but we do not represent that it is accurate or complete. Additional and supporting
information is available upon request. Certain transactions or securities mentioned herein, including those involving future, options, and other
derivatives products give rise to substantial risk and are not suitable for all investors. Jefferies transacts business with counterparties on an arm’s
length basis and on the basis that each counterparty is sophisticated and capable of independently evaluating the merits and risks of each
transaction and that each counterparty is making an independent decision regarding any transaction. This information is not to be considered an
offer to sell or solicitation of an offer to buy the securities or other products discussed herein. Jefferies may have a long or short position in the
securities or in related financial instruments or other products discussed herein, and may make purchases from and/or sales to customers on a
principal basis or as agent for another person. Jefferies also may have acted as an underwriter of such securities or other products, and may
currently be providing investment banking services to the issuers of such securities products. Pursuant to this relationship, Jefferies may have
provided in the past, and may provide in the future, financing, advice, and securitization and underwriting services to these clients in connection with
which it has received or will receive compensation.
14
3