Thursday, July 12, 2007

More concerns about CMBS defaults...

Fitch Ratings (the third place agency behind S&P and Moody's) put out a report yesterday warning of potential defaults in the CMBS market because, raising rents notwithstanding, some owners have had "overly optimistic expectations of future rental rates, sales growth and market growth."

Lenders have already reacted. While there is still a ton of money chasing deals, credit has tightened and interest rates are up. And it is harder to get a good price on a building these days. Properties have been selling at cap rates that boggle my mind.

On the upside, even if there are some defaults, we are at historical lows right now, so a correction is almost inevitable. The lowest tranches and the B-piece (unrated) buyers are the ones most likely to be affected here, and they get high returns in exchange for that risk. I don't think we are in for a crash, just perhaps a return to some semblance of reality.