Simmering beneath the surface and unbeknownst to most is a pronounced deterioration in commercial real estate. The evidence is can be seen in widening spreads in the tranches of Commercial Mortgage Backed Credit Default Swap Benchmark CMBX Indices.

Commercial real estate problems are in addition to massive problems in the guarantee business as evidenced by the huge widening of spreads on the two largest bond guarantee companies, Ambac Financial Group (ABK) and MBIA Inc (MBI).

For more on the systemic risk in the bond guarantee business, please see a Downward Spiral of Deep Junk.

Rising spreads represent a greater chance of default. In commercial real estate, most spreads are now wider than they were in the peak of the mid-summer credit crunch. This indicates two things:

  • Problems that previously affected only residential real estate have now spread in a big way to commercial real estate.
  • In spite of the big stock market rally off the summer lows, underlying credit conditions are deteriorating rapidly.

Here are a few charts in support of the above two points:

(click on any of the following charts to see a sharper image)

CMBX-NA-AAA 1

CMBX-NA-AA 3



CMBX-NA-A 3

CMBX-NA-BBB 3

CMBX-NA-BBB- 1



CMBX-NA-BB 3



CMBS Ratings

  • “AAA” means a rating of AAA (if rated by Fitch or S&P;) or Aaa (if rated by Moody’s) by any two of Fitch, Moody’s or S&P.;
  • “AA” means a rating of AA (if rated by Fitch or S&P;) or Aa2 (if rated by Moody’s) by any two of Fitch, Moody’s or S&P.;
  • “A” means a rating of A (if rated by Fitch or S&P;) or A2 (if rated by Moody’s) by any two of Fitch, Moody’s or S&P.;
  • “BBB” means a rating of BBB (if rated by Fitch or S&P;) or Baa2 (if rated by Moody’s) by any two of Fitch, Moody’s or S&P.;
  • “BBB-” means a rating of BBB- (if rated by Fitch or S&P;) or Baa3 (if rated by Moody’s) by any two of Fitch, Moody’s or S&P.;
  • “BB” means a rating of BB (if rated by Fitch or S&P;) or Ba2 (if rated by Moody’s) by any two of Fitch, Moody’s or S&P.;

(click on any of the following charts to see a sharper image)

How Tranches Work



CMBS Issuance


The above chart shows $508.4 Billion in CMBS issuance since 2005. Think that commercial real estate is marked to market? I don’t and neither do credit default swaps.

CMBS Who Is At Risk?

CMBS Top Loan Contributors

The previous four charts are courtesy of CMBS.ORG.

While all eyes have been on residential real estate problems, commercial real estate appears poised for a significant turn south. A tip of the hat to Professor Mark Bloudek for mentioning the CMBX index in a Minyanville Buzz & Banter last week.

Mike Shedlock / Mish
Click Here
To See My Five Most Recent Blog Posts