Bear's Effect on Commercial Real Estate Financing

Today's earlier post not withstanding, the collapse of Bear Stearns may have some effect on commercial real estate financing. The CMBS market has been slow to recover from the credit crunch. And this may prolong that problem. In the mean time, borrowers will continue to have to seek out other sources of financing, such as life insurance companies and commercial banks.

Little help is coming to commercial real estate from the CMBS market, which has been in virtual lockdown this year amid chronic risk aversion and concerns over a national recession. Bear Stearns's sudden collapse won't improve matters.

The run on Bear Stearns, which forced a bailout by the Federal Reserve and JP Morgan Chase & Co. (JPM), could prolong an issuance drought in CMBS by contributing "to the lack of confidence and the lack of a market," said Danielle Violi, senior vice president of CMBS Structured Finance at KeyBank Real Estate Capital, a unit of KeyCorp (KEY).

The CMBS market has been a problemin commercial real estate since the housing crash last year. While the credit crisis began with homeowners who couldn't pay their mortgages, many Wall Street banks have also reined in lending on commercial real estate on fears that underwriting standards were also too loose in commercial property. Indeed, some loans dating from mid-2006 to mid-2007 were interest-only and underwritten based on future revenue, not current cash flow.

Now, with liquidity drying up in the CMBS market, it is very difficult for the market to appropriately price the securities. And that lack of transparency makes investors even more reluctant to buy them.


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