CMBS products have been critical in expanding liquidity for real estate investors. However, as we have seen in the CDO market which were heavily invested in residential subprime loans, when spreads widen, liquidity dries up and demand for real estate falls. The marginal buyer is the last buyer, and the last buyer of commercial real estate has been using a ton of debt which has been packaged in CMBS products. Since spreads are widening, the cost to the marginal buyer is rising. And the marginal buyer is unlikely to continue buying real estate when the already negative carry widens further.
By the way, residential mortgage securitizations are down something like 40%-60% this quarter.
Supply is rising. Last year, structural nonresidential construction rose 9%.
And, in the last issue of Grant's Interest Rate Observer, according to Moody's, interest-only loans accounted for 84.6% of Q1 commercial securitized lending, up from 6.6% in Q1 2003.
I am short commercial real estate.