Although it hasn’t gotten much press coverage, Fitch for some time (see here and here) has been warning of lax lending practices in commercial real estate that sound disconcertingly similar to what we’ve seen in subprime. From a July story in the Wall Street Journal:
In a report yesterday, Fitch Ratings said the fervid lending conditions from 2005 until early this year allowed landlords and real-estate developers to load up on interest-only loans and loans with high loan-to-value ratios that were underwritten with expectations for rent increases that appear “unrealistic.” While commercial rents are rising at the fastest levels in many years — especially in some of the strongest commercial markets, including New York and Washington — Fitch said owners have “overly optimistic expectations of future rental rates, sales growth and market growth.”
Apparently the market has taken notice. Toro at Seeking Alpha provided a set of charts that show a recent spike up in CMBS spreads. He provided the full series from AAA to B; we’ll give you just AAA, A, and BBB:
Toro also points out that triple A CMBS spreads have been as high in the last ten years:
This chart isn’t as reassuring as it might seem. The last peak was in the dotcom era. Remember how dotcoms created a huge demand for office space, with the better funded dot coms going into class A space and their funkier brethren stepping up shop in all sorts of up and coming neighborhoods that had buildings with high enough ceilings to accommodate all the cabling they needed? And remember also that many of the blue chippier dotcoms, like Boo.com, came a cropper? While I am glad the markets don’t think things are that dodgy, it’s not the most encouraging basis for comparison.