Why commercial real estate deals are NOT getting done …
By: Myles, April 10th, 2008
Getting a bead on commercial deal volume is something we all want to get a handle on, especially when the activity level is down to a trickle.
In terms of current data, The Maryland Daily Record, just provided us with an overview of the commercial real estate market in Maryland by summarizing the comprehensive report on the near future of commercial real estate markets –“Trend Watch 2008: The Baltimore/Washington Commercial Real Estate Outlook,” a 60-page report based on extensive surveys of local developers combined with hard real estate data– released this week by the Johns Hopkins Carey School of Business. The report played down the severity of the liquidity crisis’s effects on local commercial real estate, but some local experts say the region is in for a long, hard year. And here may be way ….
I just saw a very interesting article in the Wall Street Journal regarding Commercial Mortgage Backed Securities (CMBS). In recent months we have focused many Blog entries on this most valuable financing instrument, as CMBS have become the engine that has powered the overall market.
By drilling down further on the current CMBS market, it is now apparent why so few deals are actually getting done.
Turns out that CMBS — from a technical perspective – are actually broken down into, and sold as, what are referred to as B-pieces; the riskiest portion of the securities package. The smallest players in the financing mix (in terms of size), the B-market buyers, are now substantially reducing their risk by highly scrutinizing each the weakest pieces of these security packages. Simply put, if you can not get the B-piece approved, the overall deal fails.
Therefore, these little known investors are dramatically impacting the overall big-name deal-flow, by significantly reducing the number and ultimate size of the CMBS packages that are closing.
Clearly we can not change the future, but if we know what signs to look for, that is a huge factor in improving our chances for success.
So, as the CMBS B-piece goes, turns out, so goes the entire commercial market. It may not be pretty, but that is our reality, as of today.
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