Tuesday, August 26, 2008

The Disconnect Between CMBS Index and Fundamentals


“The majority of CMBS bonds are triple-A bonds, and the triple-A buyer has just gone home,” said Leonard Cotton, vice chairman of Centerline Capital Group, an asset manager with a core focus in real estate and more than $14 billion in assets. “They're not willing to take the risk in price if a bond bought today is worth less tomorrow, even though the fundamentals are the same.”

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.
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