Googling Growth

By Marcelo Bermúdez, President, Figueroa Capital Group, subsidiary of Charles Dunn Co.:

One of the recurring issues a business or real estate professional deals with is what has been called the “Google Effect,” which confuses popularity of information with its actual quality. Case in point: securitized products. While they represent a complicated portion of the fixed income sector, their importance in helping markets grow is paramount.

Acronyms, like ABS, CDO’s, CLO’s, CMBS, and MBS became part of everyone’s vernacular over the last six years even if they weren’t finance professionals. Even though they gained a bad reputation because of the 2008 fallout, securitized products provide much needed liquidity by flushing balance sheets with fresh resources, decrease the cost of capital, and spread the ownership of risk.

The bad-boy characteristic securitized products gained after 2008 may have been how SIV’s (structured investment vehicles) and conduits were structured and how they were demanding more flow of MBS product than banks and other originators could provide. Even with more conservative underwriting and onerous rules in place, 2013 U.S. CMBS issuance grew from $48 billion in 2012 to more than $86 billion in 2013 – almost an 80 percent increase.

There is no crystal ball, but you can certainly look at some important indicators to figure out that the winds of commerce continue to blow in the right direction. Although there was a big “swing and a miss” by economists regarding the actual jobs numbers this past December (200,000 predicted, 74,000 actually created), the recovery of the stock market, housing prices, and lower personal debt balances have helped to push GDP to expect growth at 3 percent for 2014. It is also clear there are jobs to be had, but the employment pool either lacks the skill set or is unwilling to take a cut in pay. More encouraging is that a good percentage of workers who are currently employed are taking other jobs, which shows confidence in the market.

As any public figure that falls out of the graces of the news outlets, securitized products have been deemed acceptable again. CMBS is expected to surpass the $120 billion mark in 2014, a good sign for investors of commercial real estate.  Interest-rate spreads should continue to narrow and give life insurance companies and Freddie/Fannie a run for their money in terms of competition. While spreads may be thin, rates might continue to rise given the easing in the Fed’s quantitative easing program.