Assessing the Evolution of CMBS Underwriting

Abstract

It is almost a consensus opinion that we are late in the innings of the CRE (Commercial Real Estate) market cycle, given the length and strength of recovery since the Global Financial Crisis. One of the key triggers of the previous crisis was the loosening of underwriting standards with risk layering. Albeit the underwriting standards should be designed to enable lenders to identify and mitigate credit risks, cycles of underwriting standards are a function of competitive landscape of the origination market, interest rate environment, and borrower demand. This article aims to answer three questions: How did the underwriting standards evolve since the financial crisis, especially under the new regulations on risk retention? Have the underwriting standards loosened enough to trigger another crisis? How can CMBS investors position for the current CRE credit cycle?