Analysts growing wary of CMBS market (again)

Posted on October 18, 2016

NEW YORK, Oct 14 (IFR) – Morgan Stanley sounded the alarm this week in the CMBS market, saying some recent bonds could lose as much as 8.9% – enough to leave several layers of investors wiped out.

The dire warning underscored that the commercial mortgage bond market is still plagued by some of the same problems that led to a wave of defaults after the last financial crash.

MS analysts said ballooning debt loads, weak property financials and razor-thin returns could lead to devastating losses.

They warned that losses on some bonds sold only two years ago could be as high as 8.9% once wobbling property prices, rising interest rates and tighter credit conditions take hold.

Even in the base-case model, losses could climb to 8% on some of the more aggressive deals, Morgan Stanley said in an open call with market participants on Tuesday.

Those numbers are among the most dire estimates yet for a key asset class that helps fund office towers, hotels, shopping malls and other commercial properties.

Outstanding commercial mortgage debt now stands at US$2.9trn, according to Richard Hill, Morgan Stanley’s head of commercial property debt research.

And refinancing that debt – at likely higher rates – will only add to the sector’s woes.

“There is no more constantly being able to refinance at lower rates,” Hill said on the call.

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