Commercial real estate had a banner year in 2015, and the fundamentals of high demand and low vacancies are still driving rents higher. There is, however, a catch that could cool the market quickly, at least when it comes to financing. Investors are insisting on high yield, and the bonds backing commercial mortgages are not giving them that, so they are moving on to other products, leaving a big crack in commercial financing.
"I think cracks is a little bit of an understatement for where the market has been for January and February, where, for all practical purposes, the market was frozen," said Willy Walker, chairman and CEO of Walker & Dunlop, a real estate finance firm.
Commercial real estate, which includes apartments, shopping malls, offices and warehouses, are backed by nearly $3 trillion in mortgages, according to the Mortgage Bankers Association (MBA). The lenders include big banks, which are the largest, insurance companies and commercial mortgage backed securities (CMBS), which are bonds sold to investors. That last one is where the problem lies. It is the second-largest source of commercial real estate debt, and during the last boom, back in 2005, CMBS was very popular.