Mortgage-Bond Selloff Threatens Rebound in U.S. Commercial Property Market
The nascent recovery in U.S. commercial real estate may be cut short as Europe’s debt crisis and Standard & Poor’s credit downgrade of Treasuries send borrowing costs to their highest in more than a year.
The outlook darkened in the past month amid a selloff in securities linked to debt on properties such as office buildings and retail outlets. Top-ranked commercial mortgage-backed securities yielded about 298 basis points, or 2.98 percentage points, more than Treasuries as of yesterday, according to a Barclays Plc index. The yield was last that high in July 2010. The spread jumped 35 basis points last week and is up 89 basis points since the end of the second quarter.
Further cracks emerged on July 27 when S&P pulled its rating on a $1.5 billion bond sale by Citigroup Inc. and Goldman Sachs Group Inc., roiling the $600 billion CMBS market. The banks had already been forced to overhaul the transaction to increase collateral protection and boost yields to attract investors.
“It’s another hiccup we didn’t need in this recovery,” said Dan Fasulo, managing director at New York-based property- research firm Real Capital Analytics Inc.
The CMBS market provided the cheap debt financing that drove commercial real estate to record highs in 2007, and sales of the securities were starting to come back gradually until last week’s upheaval.
For Wall Street firms seeking to package commercial- property loans into securities, the widening of spreads eroded potential profits, said Mark Zytko, co-chief executive officer at Mesa West Capital, a Los Angeles-based company that oversees $2 billion in real estate loan funds. That will discourage additional lending, leaving buyers and owners seeking to roll over their debt with fewer financing options.