Time To CMBShort

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.


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