I don't think I'd normally mention this (WSJ sub req'd) if not for the deja vu I experienced on the way home tonight. While driving from DC into MD, a short simple drive, I heard an ad from the National Association of Realtors about how now is a great time to buy commercial property and how you should enlist a Realtor(TM) to do so. Heh! If this isn't a sign that the low default rates of the commercial RE market are not long for this world, I don't know what is.
Now, the WSJ article makes the point that default rates are at historic lows, and since the CMBX tracks prices on credit default swaps and not actual cash bonds, its a bit difficult to really say that this is an indicator of problems in the market. Fair points, true. The article also points how trading in the commercial cash securities has dried up, while speculators may be shorting the CMBX and thus driving the CDS prices higher. Finally, it talks about how the ABX indices showed similar behavior last year before all the oxygen got sucked out of that market (along with the liquidity).
Now, I am one to believe that even with speculators going short in this market, there is real stress (and thus opportunity) here. First, the best historical precedent for this behavior *IS* the cratering that ABX showed last year. The indices haven't existed long enough to have a history during times of market stress, so unlike the rating agencies and how they evaluated sub-prime derived securities, we can and should look at the performance of other similar indices to get a sense of what may happen. (Nothing is guaranteed, but some information beats no information any day.)
Also, if default rates are at historic lows, in a time of market stress, does anyone seriously think they are going lower? Mean reversion, anyone?!?!?! Now, the article talks about defaults climbing to 4x the historic average, which seems a bit high but we did just have a massive credit bubble so is it really so far fetched to think that 6 - 8% is outside of the realm of possibility? I think not. Maybe not probable, but definitely possible.
The NAR radio spot was the kicker, though? Why is the NAR advertising for purchases of commercial real estate on DC 101? I've heard some really dodgy ads on DC 101, admittedly, but this one screams "Sell!!!" Isn't this the same NAR that has been promoting that any and every time is the perfect time to buy a house? Not really, if you don't have 20%+ for your down payment and spotless, perfect credit. (1 out of 2 ain't bad :) Ha ha!) And while commercial may not yet be experiencing the kind of pain we've seen in residential, isn't there a well known lag here. I think Calculated Risk has put it at about 6 months, although that's clearly not a perfect number. However, I think it is about time for the cockroaches to start appearing in the commercial real estate kitchen. And where there's one...
Just my thoughts. If you happen to hear the ad (or similar ad), let me know what you think. Until next time...
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