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Commercial property debt also in a bubble [ClearOnMoney]
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Commercial property debt also in a bubble

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Commentary

Commercial property debt also in a bubble

6 Nov 2014 by Jim Fickett.

The Fed's easy money policy is encouraging massive issuance of poor quality debt that will eventually lead to defaults. This is most notable, and most important, in the corporate credit market, but is also significant in several other areas. The Financial Times pointed today to excessive prices and lax lending standards in the commercial property sector:

Years of low interest rates and intense competition between lenders has helped push US commercial property prices to a new record – surpassing a previous peak reached at the height of the credit bubble in late 2007 …

The new record comes at a time when regulators, bankers and others have been warning about the rapid rebound in certain types of commercial lending as originators loosen their underwriting standards to gain more business.

Analysts say many banks have swapped home mortgages in favour of lending to companies while a host of new lenders like hedge funds and private equity firms have also entered the space, helping to fuel the turnround in commercial pricing. …

Sales of commercial mortgage-backed securities (CMBS), which package loans secured by everything from office buildings to shopping malls, have surged as investors seek out the riskier but higher-yielding assets. …

Demand from yield-starved investors has kept borrowing costs low, with the average coupon for CMBS conduit loans currently at about 4.6 per cent, according to Moody’s, compared with 6.2 per cent during the fourth quarter of 2007. …

In a [Moody's] report released last week, Mr Philipp warned that CMBS standards are slipping: “Despite still-fresh memories of the run-up to the pre-crisis peak and the subsequent CMBS issuance shutdown, loan originators have reverted to old patterns.”

The corporate credit market is many times larger than the commercial property debt market. Nevertheless, every sector is important, first, because the trigger for the credit crisis could come from any direction, so it is important to keep an eye on all overheated sectors. And second, since there are so many overvalued and fragile markets, the next credit crisis will very likely see a highly correlated price drop across many kinds of assets.