Time To CMBShort

Tyler Durden's picture

One of the more notable events of the past few weeks is that the formerly unbreakable IYR REIT index not only broke its unprecedented rise, but literally imploded, plunging to levels not seen since mid-2010. Which means it may well be time to start sniffing around into the real meat of the underlying market: CMBS. And by the looks of things the perfect storm for CMBS, which has so far been very resilient, save a few jitters since the begining of August, is coming. First, the WSJ took aim at CMBS last night, writing that "Commercial real estate could be losing its cachet as a safe-haven investment due to concerns about the economy and reduced access to bank financing for landlords." And now, Bloomberg follows up with an article based on the Deutsche Bank report below, which disusses how "Losses on securities tied to commercial-property loans are poised to climb as lenders pull back, choking off funding to some borrowers with debt coming due." Lastly, the recent mutiny by S&P to rate CMBS deals which led to the pulling of a $1.5 deal by Goldman and Citi, only means the variables in the market could easily drive away the marginal buyers who until now had hoped the Fed would never allow the commercial real estate market to topple, collapsing rents and bankrupting retailers notwithstanding. As for Deutsche Bank, here is the punchline: "The environment for commercial real estate financing has been dramatically reshaped in the last few weeks. Capital is more scarce and acceptable leverage limits have decreased, which limits proceeds available to borrowers and restricts real estate values." Translation: the levels across CMBX 1-5 are likely about to start the mean reversion walk much higher from current indications. We expect virtually all vintages of CMBX AJ to widen to 1,000 if not more over the next few months.

Recent spreads:

And longer-term...

And here is the Deutsche Bank report in question which will make the rounds tomorrow as various CMBX offers are being silently and breathlessly lifted.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
mayhem_korner's picture

Liquidity, liquidity, o where art thou liquidity?

nuinut's picture

repatriating back into the foundations of the system


Biggvs's picture

Suggestions for how to open a short position in CMBS? Short a REIT? A closed end fund perhaps? Or the IYR ETF? Cheers.

Lazlo Toth's picture

SRS. (Not to be considered investment advice - any money you make is not my fault.)

Biggvs's picture

That's an idea. I did go long SRS happily back in 2008, though I dunno that I'm a fan of the leverage & daily rebalancing. It would also be nice to be able to short commercial without also shorting residential. Just wondering how other people are playing this. Will have to have a look at SPG as well.

dallasgringo's picture

The only true way is to buy CDS on the CMBX series of your choosing. Not an easy thing to do for a retail investor. 

crazyjsmith's picture

Your better bet is to short the financials, because this is more of a Banking/Financing issue than it is a Real Estate issue.  Those smart institutional investors are picking up properties using very little leverage today, and there is very little building going on today.  Cash flowing properties will be attractive for many many years, and this "shoe dropping" hasn't really happened to the property owners of low leveraged properties, because again, this is a Banking problem not a Real Estate problem.  Shorting Real Estate could really bite you when inflation accelerates.   

rosiescenario's picture

...think you are right...at the end of the day it is a banking problem, but it is going to be a bigger problem for many of the smaller regional banks because their capital ratio is already near the limit.

Flakmeister's picture

Ah, the ghost of SRS rises from the ashes....

JW n FL's picture

Germany Fires Back!

Europe and next the U.S.A.!


zorba THE GREEK's picture

Everything's turning to kaka. ( Except PM's, of course )

buzzsaw99's picture

Brick and mortar is dead and yet every reit in the known universe is overweight spg. whatever.

Cdad's picture

Correct.  Over owned.  Selling SPG is the best way to directly take a shot at the commercial property group.  Clean, simple, correctly targeting a weak consumer going forward...and its...MALLS.  I don't know if you saw Dawn of the Dead, but when the zombie apocalypse finally comes...you don't want to own a mall.


I am more equal than others's picture

Nancy 'the walking dead' Pelosi's husband owns CBRE.  Never fear about those values, Nancy will get those CBRE fellows to pump up the values, pump up the values.  All you got to do is believe... I say believe!  CBRE only says your fees are porportional to your value.  The sky is the limit baby!  Stratospheric!

Strider52's picture

Here in Orange County, MANY office buildings are vacant, and have been for some time. It's amazing to see how much they must be spending on maintaining the lawns, trees, etc, on huge empty buildings.

buzzsaw99's picture

if/when they have to cut that dividend look out below.

PulauHantu29's picture

RE is in The Great Correction:


Big Changes in Housing Market and Financing Mean No Turnaround in Sight Yet

By Alex Ferreras


Redwood: Government support of mortgage market 'not sustainable'



Caviar Emptor's picture

Corpses of 2008 buried in the basement coming back to haunt. 

See the film version aka "I know what you did last crisis" 

ghostfaceinvestah's picture

The thing that would really kill CMBS is if the FDIC and Fed no longer allowed banks to literally extend and pretend - they have told banks that as long as borrowers are paying, no matter how underwater they are, feel free to extend terms, whatever, and no need to take an impairment.

If that ever changes, the domino effect will take down the whole commercial mortgage charade.


"If a mall developer has 40% of their mall vacant and the cash flow from the mall is insufficient to service the loan, the bank would normally need to set aside reserves for the entire loan. Under the new guidelines they could carve the loan into two pieces, with 60% that is covered by cash flow as a good loan and the 40% without sufficient cash flow would be classified as non-performing. The truth is that billions in commercial loans are in distress right now because tenants are dropping like flies. Rather than writing down the loans, banks are extending the terms of the debt with more interest reserves included so they can continue to classify the loans as "performing." The reality is that the values of the property behind these loans have fallen 43%. Banks are extending loans that they would never make now, because borrowers are already grossly upside-down."

john39's picture

you can only hold your breath so long...

dallasgringo's picture

Your comment is correct of commercial loans held by banks but the actions of the FDIC have no bearing on loans sold into CMBS.  Banks originate the loans, sell them to issuers who in turn structure them into CMBS bonds which are sold to investors. Banks are out of the mix as soon as the the issuers place the bonds.

The FDIC is being very lax on its loan loss reserve requirements because if it forced every bank to mark their portfolios to market, there would be an immediate surge of insolvent banks that don't have access to enough capital to true up their capital ratios. Then the FDIC would have to wrap them and, well, the FDIC is broke. That's why they choose to fail banks only when there is a buyer there to immediately assume their deposits and liabilities.

Rainman's picture

I can see thousands of " independent accounting " whores wearing gas masks when they do these bank books.

rosiescenario's picture

...."they have told banks that as long as borrowers are paying, no matter how underwater they are, feel free to extend terms..."


wish that were true in Norcal...now working to get loans on 2 commercial properties renewed and the banks demand that they be re-appraised forcing a major capital contribution from us. Here's the problem, many of the smaller banks that are active (or were) in the commercial market are up against the permitted Fed capital ratio, so when you go to renew a loan they demand a massive pay down based on the new appraisal....we're talking 40% to 50%.


IMHO many folks are going to walk away from these properties because they will not have the means to meet the capital required.


And, the property tax base is getting hammered. One property is on the tax roles at an appraised value of $980,000....the bank appraiser comes in at $580,000...you get the picture.

Bicycle Repairman's picture

Like we need more commerical real estate development.


RockyRacoon's picture

When the anchor stores are Vietnamese nail salons it's about time!

Caviar Emptor's picture

During 09-now the banks have simply made private deals with owners of half-empty, underwater office buildings, purchased during the boom, in order to avoid foreclosures and write-downs on bad debt. That was when the banks presumed the Fed had their back come hell, high water, flying pigs or even utter mismanagement, fraud, bankruptcy or anything else. The tone has changed since the last FOMC. 

jal's picture

Cash is king.


I wish I had cash to buy a shopping center. That is a deflation purchase 50-75% off market evaluation.


mayhem_korner's picture

Give it a little time...you'll be able to grap your shopping center for a a sleeve or so of Krugerrands.

ironymonger's picture

I'm not sure what you would do with it though. The small-footprint retail model is broken. Only so many nail-salons and Starbucks to go around.

Then again, my dojo-coffeehouse-that-becomes-a-nightclub-at-night is sure to take off one of these days.

SumSUN's picture

Gonna buy some puts on MAC (Macerich co.) tomorrow. Maybe late 2011 exp.  High P/E, high Debt to equity.

Sequitur's picture

Real estate in the U.S. has been massively, massively inflated across all asset classes, residential and commercial. I watched in amazement as coworkers spent $600k+ on overpriced stucco boxes in 2004-2007, with huge HOA fees thrown in. Waste cash flow much? Yep, you guessed it, a fair number of them went BK the last couple years, and a high percentage either short-saled or were forceclosed. Meanwhile I stayed on the sidelines this entire time, I just knew it was a goddamn bubble, and now we've profited nicely. Still have my savings, and more and more is getting funneled into commodities, including gold.

If you are looking for a home, wait. Continue to wait, even if you have to sit out through the Fed's 2013 ZIRP bullshit. Higher interest rates ARE coming, and when they do, it will be a massive sledgehammer on real estate prices. There will be significant drops. For those who protected their capital and kept the powder dry this entire time, you will be richly rewarded, such that you may have set yourself up for the rest of your life so long as you keep expenses in check. Truth.

PS we recently rented some commercial space for our business, there is a shit-ton of space on the market, we got our small space for dirt cheap. We saw scores of buildings that have been sitting empty for years, some of them sitting on bank and insurance co. balance sheets. Also saw many nonperforming properties, it's a sea of red. Must be costing them quite a bit.

max2205's picture

Thinking once the fed removes the finger from the dike. They may reinsert it

hambone's picture

Totally agree w/ what you say...but still IYR and other REIT's trading at post '09 peaks of $60 up from $20 in March '09 (down from peak of $90 in '07)...all w/ nearly a 4% yield. 

Short vehicles for IYR and the like have been destroyed...down 99%+.  Many have gone for the holy grail of shorting REITs only to be left w/ nothing to show for it.  Seems until rates start inching up, may be best to remain on sidelines?

Cdad's picture

Interest rates [on T bills] will not be that much of a factor IF the banks that hold the paper on commercial mortgages start taking the rest of their losses on commercial real estate loans.  Action in bank shares is telling you that the distress is there.

As for the present value of inverse ETF funds on real estate, that is a matter of math.  However, they have a tendency to correct [up] very, very sharply, as seen recently on FAZ.  And when they do, they will clearly and cleanly break the uptrend of the underlying RIET shares.  This will commence selling of long RIET positions regardless of where those inverse ETFs settle out.

Nope...I remain convinced...RIETs are a big short on rallies.  SPG is the primary target....with AVB to follow on a bit slower timeline.

hambone's picture


I'm bearish as hell on the REITs and have a short position and know every reason why they should go down...what I'm looking for is what I've missed and why they should continue to appreciate...including outright manipulation.

SwingForce's picture

Look at component companies- they are not leveraged- they sold more shares in 2009 (like banks) to buy down their mortgages- IYR is NOT a microcosm of the CRE market which is crap. IYR will make new highs with XLU as Treasurys drop.

Boilermaker's picture


SPG - 41 X PE


BXP - 102 X PE

VNO - 23 X PE

PSA - 35 X PE

....in a DECLINING environment with plunging consumer confidence, spending, and an artificial interest rate environment.

scatterbrains's picture

lets not forget any riots and looting.

Sequitur's picture

Woah thanks for this post. How in the hell is BXP valued at a 102 p/e in this environment?

Boilermaker's picture

I think the common smack is that you should measure REITs on their FFO rather than PE ratio.  But, when you get to triple digit valuations...well, I don't know...it seems a bit extreme.

Cdad's picture


The thing you are missing is the thing you already know...free money from the Fed that has been pulling down that RIET yield for three years.  That gig is up. The risk to these guys now is reduced cash flow from weak consumers [hitting weak lease holders] and hits on principle from write downs.

Banker confession time draws nigh.

crazyjsmith's picture

Hambone, REITs own hard assets, mostly cash flowing hard assets.  Some have low leverage, and anything with a yield is getting gobbled up.  Don't confuse Cash Flowing Real Estate with bad debts and CMBS's blowing up.  That is the banks problem.  That is why you haven't seen the shoe dropping on Commercial Real Estate, because banks are willing to negotiate with a cash flowing commerical property owner, unlike the middle finger that the residential home owner gets.  People outside of Real Esate think they can apply the residential real estate to commercial real estate.  You can't.  If you are shorting these REITs, you might find yourself really hurting when inflation accelerates. 

If this market really gets hit, the banks will take the biggest hit, not necessarily commercial real estate.  Yes prices will get hit, but those investors that didn't leverage up, will just keep collecting those rent checks and wait for inflation to help them out.  I am not talking about Malls either, that stuff is crap.  If you really study occupancy rates for high end office space, "Core" office, those rates stayed relatively high compared to class b and class c.  The prices of RE have been kept artificially low because of the lack of financing.  Compare that to the manipulation pushing the other way for the stock market.  Now, they haven't been building much high end office space, and there is very little plans or financing to support any building in the near future.  Add in some inflation, a market that is being kept artificially low, and supply and demand, and you have a market that I would not feel comfortable shorting.  But that is me.  Do your own research, and do what your gut tells you. 

max2205's picture

Just walk away Renee, and don't come running here no more. BOOOOOOOOOOOOOOM!!! Take the Fed away and we got nothing, nothing I say.

Boilermaker's picture

Wow, Tyler, FINALLY you are giving this some pub!!!

For awhile there....I thought you didn't like me.  After relentless shouting from my bullhorn I finally get some love!

PaperBear's picture

What the hell is going to break next ?

Someone get the popcorn.

SwingForce's picture

Beautiful Tyler! Investigate, don't take Reggie's word for it. IYR pays a DIVIDEND, at the high price of the stock 7/7, the yield was 3.43%. At the low price it was 4.40% today it yields 3.82% based on a 54 cent dividend per quarter. 

Dividends are what's left over from rents minus expenses from the partnership, so even if rents were to drop 50%, the payout would still beat Treasurys. And most of the component companies are not leveraged via mortgages.

The incessant drop day after bloody day was far worse than the S&P or RUT, because these shares underlying are not very liquid, but just like electric utes and the top 1/2 of the Dow, you Doomers are going to find out that there are companies paying REAL CASH every 3 months, and they have MANAGERS who actually manage, not like the Obie-Debt-Bozos we have in Wash DC.  

ConEd and SoutherCo  ED SO made new 52 week highs today, the money is piling IN. IYR retraced 60% of its drop from the high so far, S&P only 40% at today's highs (35% at close). SHOW ME THE MONEY! Nobody cares about dividend yields, but how come the bond market which is so much bigger than the stock market, has all these people racing in for half the yields and all the taxes? Stock divs are taxed at 15%.

Boilermaker's picture

LMFAO.  Yes, yes, yes, buy the REITS with astronomical valuation levels and a dividend that will be tossed at the very scent of a rate hike.  You can lose both the share price AND the dividend.  It's beautiful.  And it's REAL CASH also.