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Risk In Commercial Real Estate Market May Be Overstated
The CMBX/CMBS (Commercial Mortgage Backed Securities) spreads may be overestimating potential default and loss rates for commercial loans by as much as three times, according to a recent report by CBRE Torto Wheaton Research (TWR).
report by CBRE Torto Wheaton Research (TWR).
CMBX (a set of derivatives that provides insurance against defaults) tranches rated "A" and above are particularly undervalued from a credit performance perspective, says the report.
Current CMBS valuation implies loss rates in which the highest loss rates recorded-160 bps in 1992-continue for a number of years. Loss rates would need to jump this year and be sustained at high levels for several years to justify current CMBS pricing, says CBRE TWR.
According to CBRE TWR’s analysis, the cumulative ten-year loss rate for the entire CMBS conduit market is anticipated to be 2.53 percent.
Vacancy rates across all major property types are expected to increase for the next few years, but the peak vacancy level, expected around 2009, will be lower than the peak in 2002/2003, says the report. Market rents are also expected to grow some in 2008 and 2009.
"The anticipated increase in commercial mortgage losses has caused the credit markets to significantly overestimate the potential for future default rates. The reality is that commercial real estate markets remain sound," says Jon Southard, director of debt management and valuation for CBRE Torto Wheaton Research.