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FacebookThe CMBS market is paralyzed and the CMBX says prices will fall 23 percent over the next three years. There are a lot of interest only commercial real estate mortgages in CMBS portfolios and many will begin amortizing this year. If a recession is upon us and those borrowers can’t meet their debt service requirements under the new amortization – it seems to me we have a repeat of what is happening in the subprime universe.
You have made a good point, as always.
It does seem that the U.S. is headed down that road.
The commercial real estate market is much broader and dynamic than the residential market. There are many property types, whose valuations seldom move in unison. The basic property types are: retail, office, industrial and multifamily residential. The health of each of these markets is determined, to a large extent, by supply and demand. Supply is measured by vacancy rates, while demand is a function of the underlying business climate.
A recession hurts demand, however these markets are very slow to react. In our current economy, the issues we have seen have been largely on the consumer side. Corporate borrowing tends to be more conservative and more heavily scrutinized by the banking industry.
I expect that the commercial market will remain stable through this downturn and not experience the foreclosures and value deflation that we’ve seen on the residential side.