Why Subprime Residential Lending Affects Commercial Real Estate Lending

Doug Marshall
Market Assessment
Published May 8, 2008

The question is persistently asked: why is commercial real estate financing suffering from the backlash caused by sub-prime residential lending?

CRE brokers and borrowers find little correlation between the two markets and therefore remain confused as to why the downturn in one is so affecting the other.

The reason pointed out by Dan Smith in the latest Commercial Mortgage Insight magazine is simple: the similarities in the two markets are driving them in the same direction more than their differences.

Basically, both markets syndicate and securitize their loans on Wall Street. The investor in securitized mortgage pools, for whatever reason, is not recognizing the major differences between the two lending markets: very lax underwriting in the subprime residential market compared to relatively tight-controlled underwriting for commercial lending.

More importantly, the delinquency rates for residential subprime loans are soaring compared to a very modest 0.3% for commercial loans. But it is the similarities between the markets now which is driving both toward the same depressed condition.

The market isn’t expected to stabilize for a couple of years, until new investor money comes into it, easing liquidity and injecting optimism.

But the impact has been minor for the second- and third tier lenders who seldom securitize their commercial real estate loans.

There is still plenty of money available for the smaller, “bread and butter” type of properties, albeit at more conservative rates and underwriting standards.

Source:
Commercial Mortgage Insight (May 2008)