Tremors in the market for commercial-mortgage-backed securities are hindering the recovery of the commercial-property sector.
Over the past 18 months, values nationally have been rising, thanks in part to Wall Street’s success in rekindling the business of pooling together commercial mortgages and selling them to investors as bonds. This has provided a critical source of deal financing for property buyers.
But the new-issue market for these securities has hit a speed bump amid turmoil in the capital markets, causing a key set of lenders to back off from making new loans. The result is that deal activity has fallen, putting the brakes on the rise in values.
“Lending has clearly slowed significantly,” said Richard Parkus, an analyst at Morgan Stanley.
Real-estate companies have clearly noticed. Late last month, for example, Hotel chainStrategic Hotels & Resorts Inc. obtained a $145 million loan for its InterContinental Hotel in Chicago from J.P. Morgan Chase & Co. But the closing of the mortgage, which J.P. Morgan plans to securitize, was delayed for days because of uncertainty in the markets, said Laurence Geller, Strategic Hotels’ chief executive. A representative for J.P. Morgan declined to comment.
“We seem to have squeezed in under the wire,” he says. “If it had been a week later, it would have never closed.”
Earlier this year, some analysts were predicting banks would issue as much as $50 billion in new commercial-mortgage securities this year. Now, they are saying volume may be as low as $30 billion to $35 billion.
A test for the sector is slated for later this week, when Deutsche Bank AG and UBS AG intend to sell a pool of $1.4 billion in commercial mortgages. In response to the skittish market, the deal will offer investors 30% in so-called credit protection, nearly double the levels they offered in their last issuance in June.
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