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CMBS Woes Stymie Deals

Delinquencies on CMBS have risen, but the increase is not nearly enough to account for the market's weakness. Moody's delinquency tracker, which follows delinquencies in excess of 60 days on loans backing U.S. CMBS transactions over the past 10 years, showed a delinquency rate in June of 0.45%, up one basis point from May and up 23 basis points from the low of 0.22% in July 2007.

At those rates, even if the delinquency rate triples, the commercial real estate market remains a solid investment and is not likely to see a collapse like the one residential real estate has experienced, Mr. Cotton said.

But some investors expect the value of CMBS bonds to fall and have been shorting the index used to price them, driving up the cost of CMBS by as much as 300 basis points and scaring away buyers, Mr. Vrchota said.

“There's a pretty big disconnect between the [CMBS index] and the fundamentals,” he said. “It implies a very high default rate that we just don't see anywhere.”

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Spotted at Deal Junkie.

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