At MarylandCommercialTitle we actively track commercial real estate activity and the trending that is taking place in the market.  

We focus our attention on deal volumes, as this benchmark is a key threshold for all real estate professionals, for obvious reasons.

We first raised the CMBX Index issue – the little known London-based index that tracks the values of bonds backed by commercial mortgages on office buildings, hotels, malls and the like—in our November 7, 2007 Blog and then again recently on February 23, 2008.

Negative news tends to travel fast and furious. And the CMBX Index story is/was certainly no exception to that rule.

But here is a new take, a new perspective, on the outlook as to whether or not the commercial market will trend downward, based on the clear fall of Commercial Mortgage Backed Securities (CMBS) or how able developers will be in financing projects, elsewhere.

In an April 1, 2008 piece in Seeking Alpha (and no, this is not an April fools joke!), the article outlined yet another perspective — a much more postive and optimistic view– on the future of commercial project financing. Here it goes …

In September 2007, hedge fund manager Andrew Lahde of Lahde Capital, which had previously earned huge returns by heavily shorting the ABX (the index that predicted the sub-prime collapse), launched a new fund to short commercial real estate via the CMBX. Lahde predicted a “100% likelihood” of a US recession that would cause commercial property to also tumble and that his “commercial fund [would] act as a hedge for all of the carnage still to come”.

His thesis relies heavily on exploiting the leverage often used to finance real estate. Despite a relatively placid commercial real estate market thus far, Lahde still fervently believes that the “losses will materialize”. Though he admits he doesn’t have any idea how severe the losses will be, nor does he have a model that can correctly predict all the variables (who does?).

He says he is sure of one thing though: “It is safe to assume a market is dead when deal volume falls to zero, as was the case with CMBS (Commercial Mortgage Backed Securities) issuance during January 2008.” He goes on to say that “risk premiums for this type of debt have skyrocketed as exhibited by the CMBX. If you dramatically increase the risk premium for an asset class, especially one that is so heavily financed, the value of that asset class must fall. End of story”.

But is the CMBX really an accurate gauge of risk premia these days, or just plain paranoia?

Here’s the counter to Lahde’s commercial real estate play. While it is true the CMBS market is dead, that doesn’t also mean the commercial real estate market has died along with it.

Before the CMBS market came along, real estate financing was the almost exclusive domain of pension funds, insurance companies and regional banks, the very financiers that are now stepping in to refinance that “dead” CMBS market.

Fitch Ratings decided to look into this very issue and issued a March 25 report examining the default rate of maturing CMBS deals (they all have balloons that must be refinanced on maturity).

Fitch found that a remarkable ninety-nine (99) percent of recently matured U.S. CMBS loans have been successfully refinanced.

Broken down further, a total of 3,354 U.S. CMBS fixed rate loans with a balance of $21.4 billion have been refinanced successfully since the credit crunch began in August.

The lenders were mostly insurance companies and regional banks. Lenders continue to finance assets like this because they produce reliable monthly income, not consume it.

Shy of other factors such as recession and the fiscal and psychological impacts of a down economy, seems like the luster of the CMBX story has been debunked for the time being.

So what do you think?

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