IF YOU LISTEN HARD, you can hear the pulse of the CMBS market beating again.

Conduit lenders are coming back into the market, increasing their visibility and production as the second half of the year unfolds. Firms such as Goldman Sachs, JPMorgan, Deutsche Bank, Cantor Fitzgerald, and Bridger Commercial Funding are actively quoting and closing loans. But it's a much more humble enterprise these days— the industry's heyday of 2007 seems like decades ago.

Today's conduits are targeting stabilized assets in large metro areas and large deal sizes, often above $15 million. The rates being offered are at best in the mid- to high-6 percent range, still at least 50 to 100 basis points (bps) higher than what the government-sponsored enterprises (GSEs) offer as of mid-June.

But many in the CMBS industry feel it's just a matter of time before the execution becomes more viable for multifamily borrowers. In April, a $309 million issuance from the Royal Bank of Scotland Group's Commercial Funding division was oversubscribed and another multi-borrower issuance of $716 million from New Yorkbased JPMorgan emerged in the second quarter. This slow-but-steady momentum has allowed pricing on conduit loans to come in about 100 bps since March.

“Six months ago, there were no multiborrower issues that had gone to market,” says Paul O'Rear, executive vice president and chief credit officer at San Franciscobased Bridger Commercial Funding. “We've now had one or two, and they've been well received. That gives us confidence that the demand for CMBS bonds is there.”

Slow Start

Still, it's a little too early to give the industry a clean bill of health. The economic woes roiling the Euro, and the uncertainty in pricing bonds, are slowing down the industry's re-emergence.

“The market turmoil derails it in the short term and leads to uncertainty as to how to price,” says Clay Sublett, national production manager and CMBS director for Cleveland-based KeyBank Real Estate Capital. “However, if things calm down, we will start to see loans priced more in the low-6 percent range.”

KeyBank shuttered its conduit operations after the market crashed but is now considering reentering at some point. But the firm, like many of its competitors, is still a bit gun shy as the CMBS industry continues to deal with fallout from the last boom time. The CMBS delinquency rate for commercial real estate loans (30 days or more delinquent) grew to 8.4 percent in May, with the multifamily delinquency rate jumping to 13.3 percent, according to New York-based market research firm Trepp.

One of the reasons that multifamily CMBS loans have such a high delinquency rate is that conduit lenders often stretched underwriting and lowered rates to get a certain percentage of multifamily loans into their pools. By doing so, they could sell a large percentage of the bonds to Fannie Mae and Freddie Mac.

But multifamily borrowers shouldn't expect the same treatment these days. “They would do multifamily back in the day at a breakeven or maybe even a loss to create their pool dynamics,” says Mike Kavanau, senior managing director of the Chicago office of brokerage and advisory firm HFF. “It allowed them to sell the paper to Fannie and Freddie, but my gut is that game has run its course. They're not going to do loss leaders on multifamily.”

Brave New World

Conduit lenders' new environment is a throwback to the early days of the industry—the early 90s—when conservative underwriting ruled. The JPMorgan issuance in mid-June speaks to this new world order. The pool has an average leverage level of 78 percent and an average debt service coverage ratio (DSCR) of 1.37x. In 2007 and 2008, those figures averaged 110 percent and 1.05x respectively, according to New York-based Fitch Ratings.

Deutsche Bank, for instance, was once one of the industry's greatest producers but has started up again with a very riskaverse model. The New York-based bank is offering five-, seven- and 10-year deals but favors higher-barrier cities and lower leverage deals, which allow it to price competitively, according to borrowers.

Bridger is in a similar boat. At the peak of the market, in 2007, Bridger employed roughly 95 and originated about $1.5 billion in debt. Now, with just 15 employees, the company is rebuilding toward a goal of originating about $300 million this year.

Bridger does not market directly to borrowers but instead the firm works primarily with financial institutions that lack their own securitization capability. The company is currently offering five- and 10-year loans that can go up to 75 percent loan-to-value and down to a 1.25x DSCR. Full leverage transactions are being priced in the high-6 percent range, but the price becomes more competitive on lower leverage transactions.

One competitive advantage the company offers is the loan size it will consider. The largest conduit lenders seem to be looking only at larger loans of $15 million and up. In fact, in the first quarter of 2010, the average conduit loan was more than $40 million, according to the Washington, D.C.-based Mortgage Bankers Association. Part of the reason is that conduit lenders have severely reduced staffing levels, and if it takes as much work to originate a $5 million loan as it does a $20 million loan, then the higher the better.

But unlike its peers, Bridger will go all the way down to $2 million. “If you're under $10 million, we see that supply of capital is limited, and that's the market we're focusing on,” O'Rear says.

Meanwhile, Freddie Mac brought its third Capital Markets Execution (CME) issuance to the market in mid-June, offering about $1 billion in structured pass-through certificates. The company hopes to have three more issuances this year.

Freddie's foray into securitization has gone very well over the last year, and its asset-specific focus may provide a window into the future of the CMBS industry: Many large multifamily investors, unable to find distressed acquisitions, are turning to CME B-piece investments as an alternative.

“It will be interesting to see if that is the precursor to the CMBS industry that develops,” says Tom Booher, who leads the multifamily debt team at Pittsburgh-based PNC Real Estate.