Up the Stack and Back via AFT Online Article

The demand for structured-finance products such as mezzanine and preferred equity is expected to balloon in 2012, for reasons of both exuberance and fear.

As fundamentals improve, developers are furiously sketching out plans for new construction and value-add deals. But many financiers, still nursing a hangover from the downturn, are only willing to lend or invest so far up the capital stack. So mortgage brokers are reporting an uptick in mezz and preferred-equity activity on the vanguard of optimism.

But a greater need lurks at the other end of the spectrum, as a wave of maturing, overly aggressive debt comes due. In 2007, nearly $230 billion in commercial mortgage-backed securities (CMBS) was issued as the commercial real estate markets soared. A full reckoning starts this year—a slew of five-year balloon loans taken at the height of the market will soon pop.

“We’ve all seen the charts regarding maturities scheduled between now and 2017—it’s like a hockey stick,” says Kevin Smith, who leads the Alternative Capital Division of New York–based Centerline Capital Group. “There’s going to be a huge gap between where deals are underwritten today and the equity that’s provided—there’s going to be a huge need for preferred equity or mezz.”

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