The Domino Effect

By Bell, John | Mortgage Banking, January 2008 | Go to article overview
Save to active project

The Domino Effect

Bell, John, Mortgage Banking

The credit crunch triggered by the meltdown in the subprime mortgage market has had spillover effects in the commercial mortgage market. Commercial mortgage lending executives and analysts share their views on how this has changed the market.

The nation's commercial lenders in 2008 will be facing rougher financial market conditions. The source of much of the turbulence will be the hangover from the credit crunch of 2007. Compounding the challenges will be the ongoing fallout from the swift collapse of the subprime mortgage market on the residential side. * While the commercial and residential lending markets are separate markets, they are related and extremely sensitive to each other's financial health, industry sources point out. That was clearly evident in mid-2007 as the subprime mortgage market suddenly turned south and investors on the commercial side reawakened to risk. * The credit markets experienced a sudden severe and widespread reversal in investor risk sentiment and a resulting flight to safety, according to the Expectations & Market Realities in Real Estate: 2008 report, co-produced by Des Moines, Iowa-based Principal Real Estate Investors; Chicagobased Real Estate Research Corporation (RERC); and Boston-based CBRE/Torto Wheaton Research, a business unit of Los Angeles-based CB Richard Ellis Group Inc. * The Expectations report concedes that the credit squeeze was triggered by the subprime residential mortgage debacle, but notes its true origins lie elsewhere. * These origins, the report says, include several successive years of increasing appetite for risk on the part of investors spread across the globe; an increasing use of leverage throughout the financial system; and the growing dominance of complex structured finance products in the credit system, which turned out to be riskier than most investors had envisioned.

Yellow flag is flying

As a result of all that, the yellow caution flag is out for the commercial real estate market and is likely to stay there for an extended time, the Expectations report notes.

Thomas Jaekel, chief investment officer of Chicago-based Wrightwood Capital, a leading provider of value-added capital to the commercial real estate industry, traces the evolution of the crisis: "At mid-year 2007, there was hope that disruptions in the single-family market would be contained within that market. But that changed in August 2007, when investors became nervous about the commercial market. They theorized that the same lax credit standards taking place in the residential market would also take place in the commercial market."

Jaekel says investors holding commercial mortgage-backed securities (CMBS) bonds concluded that default rates were very low, and expected higher rates as a consequence of what was happening in the residential markets. They wanted to sell, but found limited demand.

That triggered a spiral effect, which slowed willingness to originate new loans, putting the brakes on lending activity. "The financial markets are built on trust," he observes.

Robert Bach, senior vice president of research and client services for Chicago-based Grubb & Ellis Co., picks up the story: He says the credit market turmoil disrupted many investment transactions by shutting off the spigot of easy money that fueled the market in recent years. As a result, investors and lenders piled into risk-free Treasury securities, driving prices up and interest rates down for those instruments while forsaking riskier investments.

Bach concurs with the Expectations report in observing that the credit market turmoil amounts to a global repricing of risk-a reaction against lending practices that had become too aggressive across a variety of debt instruments, asset classes and economic sectors, of which commercial real estate was just one.

Many of these same conclusions are affirmed in the Emerging Trends in Real Estate 2008 report, co-produced by the Washington, D.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Cite this article

Cited article

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

The Domino Effect


Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?