Individual investors curious about the fate of commercial real estate mortgages may want to consider actions now being taken by some hedge funds and other significant investors. These major players in the investment game, who netted sizable profits from the disastrous subprime residential mortgage failures, now appear to be basing their investment decisions on analogous loans made for office buildings and hotels.

This strategy runs counter to that advocated by many financial advisors who say that the course of commercial real estate mortgages will not follow the downward path of subprime residential lending. However, applying this strategy to the “CMBX” index has pushed yields on that index sharply higher as the numbers of residential mortgages has grown.

However, forecasting increasing defaults in the $850 billion commercial real estate market because of more relaxed commercial mortgage loan underwriting practices during the past few years has provided investors with a rationale for betting against the commercial mortgage market. Until recently, Commercial Mortgage Backed Securities underwriters were making sales that included fewer protections for buyers, creating increased likelihood for losses similar to those experienced by investors in residential backed mortgage securities.

Reuters News Agency reported that Christopher Sullivan, chief investment officer for the United Nations’ employees federal credit union in New York, described the hedge funds response as “excessive.” Yields on the 25 commercial mortgage-backed securities tracked by the “BBB”-CMBX index achieved a record high of 768.5 basis points between October 10th and 30th, an increase of nearly 50 percent.

Rents and values for commercial properties are rising in contrast to those for residential properties. A spokesperson for Citigroup Global Markets reported that current delinquency rates on commercial loans are about 0.32 percent and may rise to 2 percent in the next two years, a sharp contrast to the nearly 16 percent subprime mortgage delinquencies.

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