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New National Standard for Reporting Rent Rolls Elevates Loan-Market Transparency Jim Flaherty CEO Backshop/CMBS.com T he commercial arm of the Mortgage Industry Standards Maintenance Organization (MISMO) in November released for industry comment proposed standards for the maintenance and sharing of commercial and multifamily real estate rent-roll information. The standards include 87 fields of property and financial data as well as an easy way to maintain and share the data through widely used, secure, Internet-based technology. This is a first-time industry standard that is expected to be embraced widely. Fannie Mae, which has been active in creating the standard, already has endorsed it for all multifamily originations and asset management. The importance of transparency relative to rent rolls cannot be overstated in the context of commercial and multifamily real estate. Rent rolls are a critical piece of information at the origination of a loan, during the ongoing asset management of a loan, and in valuing a commercial or multifamily investment throughout its lifecycle. To date, there has never been a generally accepted industry standard for the collection and reporting of commercial and multifamily rent-roll data, making it more challenging to value and transact assets. 87 Fields in Eight Data Containers The draft reporting standards were devised over the last year by Commercial MISMO, which develops, promotes and maintains voluntary standards for the real estate finance industry to enable consistent loan information to be obtained and exchanged efficiently and securely between mortgage lenders, investors, servicers, brokers, appraisers, analysts, agencies and others. The new standards are designed to support all types of incomeproducing property, including office, industrial, retail, multifamily, assisted living, self-storage, mobile home parks and hotels. There are 87 fields in eight data containers that make up the MISMO standard for a rent roll. Specific data fields at the property level include: Data required for the standard was sourced from multiple lenders, vendors and industry participants, who referred to various rent-roll templates currently utilized by asset and property managers. The standards contain the most commonly utilized data points. The standards can be viewed online at www.mismo.org. Industry members and the public are invited to comment on the draft, with final adoption expected in February 2017. The standards are dynamic and have the potential to evolve further over time. Also included as part of the standards are a Logical Data Dictionary with updated rent-roll dictionary definitions, sample XML for Internetfriendly data reporting and sharing, the rent-roll data model (XSD), and business use cases that demonstrate the efficacy of the standards in multifamily, retail and senior housing scenarios. Implications for Valuing and Transacting Assets The standards for the collection and reporting of rent-roll data promulgated by Commercial MISMO are meaningful and have the potential to improve the valuation and transaction of assets at every phase of their lifecycle. Industry participants including investors in commercial mortgagebacked securities (CMBS) and other real estate investment products all benefit from consistent, transparent reporting standards. While the standards are a big step forward for the industry, voluntary compliance is insufficient to assure the degree of transparency needed to value and manage assets with surety. Compliance with the standards should be mandatory at least for all public CMBS loan transactions as it provides a strong mechanism to reduce risk and volatility, in the view of this author. Jim Flaherty, a CREFC member, was chair of the working group that developed the Commercial MISMO rent-roll standards. He is the founder of mortgage originations platform Backshop and CEO of CMBS.com. • Tenant Name • Tenant Contract Rent Amount • Unit Number • Tenant Type • Lease Begin Date • Lease End Date • Lease Status Type • Unit Size • Currency Code CRE Finance World Winter 2017 26
Sharing the Experience — As Co- Working Grows, the Office Isn’t Necessarily an Office Anymore Steve Jellinek Vice President Research, Structured Finance Morningstar Credit Ratings Edward Dittmer, CFA Vice President CMBS Morningstar Credit Ratings Lea Overby Managing Director of Research, Structured Finance Morningstar Credit Ratings F ueled by structural changes in the workforce and mainstream companies looking for more flexible expansion options, co-working — another facet of the sharing economy — will play a more significant role in commercial real estate, posing challenges to underwriting and valuation standards for the commercial mortgage-backed securities market. While loans with exposure to co-working account for a small portion of the CMBS universe, office loans with exposure to co-working spaces could become a significant part of the CMBS universe as this business evolves. Since co-working’s inception with executive suite giant Regus PLC, the number of co-working spaces climbed to about 7,800 globally, a 36% rise between 2014 and 2015, according to a survey conducted by Deskmag, a co-working magazine. Even with this rapid growth, these companies lease roughly 1 million square feet backing just 1.1% of the $139.32 billion in outstanding CMBS office loans, as of November 2016. That’s a small portion of the 849.9 million square feet of leasable office space that secures these loans. Nevertheless, co-working, which typically involves individual members or member businesses paying a fee to share office space, is spreading quickly, evolving with pioneering rental models and innovative service offerings. That’s not to say that co-working will expand unabated. We believe growth will come in fits and starts, as factors such as unpredictable revenue streams, lack of long-term commitments, and economic uncertainty will play a role. Additionally, fixed costs can be high because co-working providers usually rent their space upfront and must build out the space and amenities before they can lease space to tenants. Furthermore, volatility may be high because of the lack of barriers to entry and a fragmented customer base, with niche players coming and going to serve everyone from healthcare technology to writers and designers. To protect investors from increased cash flow volatility, underwriting and valuation standards must evolve. In this regard, identifying organic demand is critical. A building with a co-working company as a tenant may have strong leased occupancy, but that may not paint an accurate picture of how much that space is being used. To gauge demand, Morningstar Credit Ratings, LLC looks at the property’s historical occupancy and occupancy within the collateral’s market. If these rates are lower, then we would assume for underwriting purposes that less space may be used than what current leased occupancy rates would otherwise suggest. Likewise, we may temper our occupancy expectations in areas showing signs of a bubble, where demand is outpacing supply and rents are rising. Shared Workspaces Offer Flexibility A typical co-working space is a site where independent professionals, freelancers, and even corporations — anyone with workplace flexibility and mobility — can come to work on a shared floor. The co-working sponsor leases space from the primary landlord and then subleases to individuals or corporations by desk, private office, or suite. The operator provides flexible terms, various amenities, and building programs to create a strong sense of collaboration and synergy. Co-working spaces have been largely occupied by independent workers seeking a cost-effective place to work outside the home, but corporate occupiers are showing increased interest in shared workplaces. Although millennials, which we define as those born between 1980 and 2000, are major influencers of office design and will most likely factor into how companies address co-working, they are not solely behind this trend. According to CBRE Group, Inc., 63% of workers using these spaces are between the ages of 31 and 50, and less than 25% are millennials. Largest Players While there are numerous co-working companies, most are too small to be among the five largest tenants at a property backing a CMBS loan. However, we found six co-working companies, the largest of which is Luxembourg-based Regus, that are one of the five largest tenants for CMBS collateral. Although not a traditional co-working company, Regus is gradually expanding into co-working. For 2015, the company reported more than 2,700 locations worldwide and more than 46 million square feet of office space, which it subleases through a business model similar to co-working; however, most of it is traditional office space. In 2016, Regus expanded on its co-working format, called Spaces, in the U.S. Regus leases more than 545,000 square feet in 27 properties securing $867.8 million in U.S. CMBS loans, but tenant risk is low, as it has more than 20% of the gross leasable area at just one property, which backs a $5.7 million loan. The workspace provider, which reported a healthy pretax profit of £84.3 million for the first half of 2016, up from £79.1 million for the first half of 2015, has seen revenue increase at an average of 15.3% per year from 2011-15. WeWork, which opened its first location in 2010 in New York City, operates 128 co-working locations in 39 cities and 12 countries with plans to expand into India, according to its website. The company has become one of New York City’s largest occupiers of commercial real estate, with roughly 2.8 million square feet as of January 2016, according to Newmark Grubb Knight Frank, a meteoric increase from 42,000 square feet in 2010. A publication of CRE Finance World Winter 2017 27
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Page 10 and 11: BANKER ROUNDTABLE MODERATORS Lisa P
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