Commercial Real Estate Market Being Affected By Credit Markets
The tightening of the credit markets due to the problems in residential real estate debt are causing a slowdown in the white hot commercial real estate market. While the residential market has slowed down in the past 2 years from it’s peak, the commercial real estate market was picking up steam and keeping the construction industry employed.
Now that their is tightening in the credit markets due the to impact of bad loans, commercial real estate is feeling the impact. The cost of credit for a commercial real estate loan has bumped up 20 to 25 basis points for a ten year fixed loan if you can find someone to quote you.
Anecdotally, I was talking with a couple of guys I know at my son’s karate class this weekend. They both are in construction and have seen their work go from 80 percent residential – 20 percent commercial to 35 percent residential – 65 percent commercial over the past year. They are still running full steam, but they fear that if commercial slows down before the residential market picks back up, they will have to layoff some of their crews.
On another tangent to this topic, do you ever notice that whenever you need someone with expertise for home repair, that is when the market is white hot for their services? If I needed any handyman work done on the house I could get it very inexpensively right now, but I need some work done on our trees. I finally could get our tree guy out to quote me and he said this is the busiest they have been in 2 years. Figures… 
That’s because the problems uncovered in the residential mortgage market meltdown have become too big for investors to ignore, so they’re cutting back on the whole real estate sector, including their use of commercial mortgage-backed securities (CMBS), which is what lenders rely on to get their loans to developers off their balance sheets.
As a result, the CMBS market has been hit by a double whammy: skittish investors cutting back on purchases and a glut of supply because of the record $137 billion in CMBS issued in the first half of this year as private equity and institutional money flooded into the commercial property market.
Because of those factors, the cost of borrowing is up as yield spreads, the difference between the yield on CMBS and the yield on comparable-maturity Treasuries, have widened significantly in the past few weeks. via Financial Week
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Pingback by Retail Traffic Court Blog on Retailtrafficmagazine » Blog Archive » Lending Woes Spreading? on 13 August 2007:
[...] Real Estate Bloggers drew attention to a Financial Week story that also looks at the CMBS sector and recent increases in [...]
Comment by David Bodamer on 13 August 2007:
There has been a sudden burst of coverage of the potential contagion to lending on commercial real estate.
Stories in National Real Estate Investor, Barron’s, Financial Week, and Reuters all have looked at the repricing of CMBS debt. And since the conduit lenders had been dictating pricing, I think other lenders on commercial real estate are adjusting to the new rates as well.
What’s missing still, I think, is that there so far has not been a real uptick in defaults or delinquencies on the commercial side.
Comment by Tom on 13 August 2007:
David
I agree that there has been little problem with deliquencies, but that tightening access to capital can put future projects or projects that are having over-runs into jeopardy.
Great comment.
Tom
Comment by David Bodamer on 14 August 2007:
Tom,
Thanks. You’re right. There is a definite tightening going on. We’re working on some of our own coverage right now of how retail real estate is being affected by what’s going on.
One of the big manifestations we’ve noticed to date is that a spread is returning in pricing for class-A assets vs. class-B and class-C. Since class-A buyers tend to rely less on leverage they’re not being affected as much. But buyers on class-B and class-C tend to borrow more. So more expensive debt means they’ve gotten less aggressive.
It’s hard to track because the data providers tend not to break down cap rates by asset quality. But anecdotally, we’re hearing a lot of examples of this.
Pingback by TrafficCourt » Blog Archive » Lending Woes Spreading? on 20 August 2007:
[...] Real Estate Bloggers drew attention to a Financial Week story that also looks at the CMBS sector and recent increases in [...]