Recent performance of commercial mortgage backed securities indicate a similar path taken by the subprime asset-backed market earlier this year.
“Commercial real estate is a full-blown bubble that feels very much at a bursting point,” said Christian Stracke, an analyst in London at CreditSights Inc., a fixed-income research firm. “There’s a fairly toxic mix of factors at work.”
Based on the latest derivatives which track the performance of commercial markets Markit Group says prices have doubled indicating one of the worst commercial real estate environments since the Great Depression. The seven-year rally in offices and retail properties ended in September when prices fell an average of 1.2 percent, according to Moody’s Investors Service. Banks worldwide are holding $54 billion of unsold commercial mortgages, according to data compiled by New York-based Citigroup Inc. that includes fixed and floating-rate debt.
Lenders are struggling to sell loans to investors after losses on debt backed by subprime mortgages to people with poor credit caused financial markets to seize up in July and August. Bonds with AAA ratings secured by properties ranging from the Sears Tower in Chicago to trailer parks in Delaware yield about 203 basis points more than similar maturity Treasuries, up from 92 basis points on Oct. 12, according to Morgan Stanley indexes.
Evidently the appetite for this type of paper has evaporated. So much for excess liquidity.
More than 75 have been withdrawn because banks aren’t lending, and that estimate is “probably conservative, because not all deals that blew up were well-publicized,” White said.
”The commercial real estate market is imploding,” said James Ortega, who manages $150 million at Saenz Hofmann Fund Advisory in Sao Paulo. Ortega has set trades to profit from a decline in property companies’ shares. “We’re about to experience a very significant correction.”
- Over 80% of commercial mortgages are interest-only. Unlike the residential bubble most of the 2004-2006 vintages were non recourse loans, i.e. heads the borrower wins, tails the lender loses.
- After bingeing on cheap credit a la the Greenspan/Bernanke Fed from 2002-2007, lenders are paying the piper for lavishing funds on marginal homebuyers, corporate acquirers, and speculators in the financial markets, commodities and commercial real estate.
- The inevitable bust is well under way, with nearly all cylinders firing, and still in the early innings.