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Not So Risky

A recent report from CBRE Torto Wheaton Research states that future commercial mortgage defaults and losses could be overestimated threefold. The culprit? Not surprisingly, overreactions in the credit markets are to blame. In recent months, prices on CMBX indices — on which derivatives contracts providing insurance against defaults are based — have signaled future defaults are in excess of historic norms and “out of line with what any likely future income stream of the underlying mortgages would suggest,” according to the report. Despite an expected incremental rise in vacancies across all major property types over the next few years, vacancies are still expected to remain lower than 2002-03 peak levels. Currently, according to the report, CMBS and CMBX markets have priced in losses tied to doomsday estimates, more in line with 1992, at which point commercial banks lost 160 basis points.

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