Commercial Real Estate Risks Less Severe Than Subprime
After raising the question Is Commercial Real Estate The Next Subprime?, CreditSights concludes that any problems in the commercial sector are unlikely to have as dramatic an effect on financial markets as the problems of subprime residential mortgages. However, the pain from a commercial real estate slump “could still be a difficult blow to a market still feeling the pinch from the US housing crisis.”
In Bubblenomics - Hunting for the Next Subprime in Commercial Real Estate (Part 2), CreditSights says inflated commercial property values, aggressively structured loans, and relatively high bank exposure for many mid-tier banks are “a fairly toxic mix of factors.”
“We might also add to these the wild card of Commerical Real Estate Collaterilized Debt Obligations (CDOs that are composed primarily of commercial real estate loans), which in recent years have grown far more aggressive in their asset selection, reaching further down into the capital structure of commercial real estate finance. Yet another wild card would be what a slump in Commercial Mortgage-Backed Securities would do to Asset-Backed Security CDOs, which so far have depended on diversification outside of RMBS in order to avoid widespread downgrades.”
“If CMBS takes a hit at the same time that Residential Mortgage-Backed Securities are still suffering downgrades (which we expect to continue well into next year), that diversification could look less and less useful.” CreditSights says.
Taking these factors together, a slump in commercial real estate could, at the very least, create a serious headache for the markets.
The full report, Bubblenomics – Hunting for the Next Subprime in Commercial Real Estate (Part 2), can be purchased here.
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