Credit Crunch Takes its Toll

From Wednesday's Wall St. Journal came a piece describing the effects of few buyers for mortgage-backed securities and how that was affecting commercial real estate.

In the past few weeks, though, nervous buyers of these commercial securities have pulled out of the market altogether or demanded sharply higher yields, fearing that many transactions were too risky. That has forced lenders to raise interest rates, increasing the cost of buying real estate.

"I have major REIT clients, and investment banks are changing the deals on them as we speak because their costs of capital have gone up," said Gary Mozer, principal with George Smith Partners, a Los Angeles-based commercial-real-estate finance firm.

Mike Kirby, chairman of Green Street Advisors, a Newport Beach, Calif. real-estate research company, estimates that borrowing costs are about 0.3% higher than they were a couple of weeks ago and as much as 0.9% higher than when Blackstone bought EOP.

It's becoming more and more clear that that debt picture for commercial real estate has shifted considerably. The question that remains to be seen is just how this is impacting how deals are getting done. As debt costs rise, how is that affecting asset prices? In the past deals that were enabled by easy money environment should fall away. Further, the fact that CMBS investors have become more skittish means that conduit lenders are enacting tougher underwriting standards and making debt more expensive.

Our sister publication National Real Estate Investor had an excellent article in its July issue examining some of these trends. But clearly this is an area that we will have to continue to monitor.

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