Commercial mortgage-backed securities, which have been maligned for providing much of the loose, easy capital that helped drive excessive commercial real estate values, should actually be held up as a model for efficiently providing commercial debt, a prominent real estate economist argued this morning.
However, Dr. Tim Riddiough added, CMBS markets won’t bounce back in time to fill the liquidity gap that their absence has left.
"There was really not much wrong with CMBS," argued Riddiough, a professor of urban real estate and economics at the University of Wisconsin-Madison.
Speaking at the Commercial Real Estate Women Network convention at Boston’s Hynes Convention Center, Riddiough called CMBS "actually a poster child of how to do a securitized market in the right way. With one little problem, which we’re dealing with now. It got swept up in the financial market tsunami, and got painted with the residential brush. The residential markets brought everything down."
In Riddiough’s analysis, securitized real estate markets failed because there was no market for risky residential B pieces.
"CMBS had, until near the end, it had a dedicated B piece market. That’s what you want. There was discipline exercised by the B piece buyers. That’s the model," he said. "When we rethink securitization, folks will focus on CMBS and say this market did it the right way."
Along with REITs, CMBS helped staunch the pain from the savings and loan crisis, Riddiough said, calling it "the solution."
This time around, Riddiough added, securitized mortgages won’t bounce back until after debt markets have healed themselves.
And, he warned, there’s either pain from deleveraging or stagnation looming between that point and now: "The real critical issue is, we’re watching a slow motion train-wreck, and can’t figure out a way to jump in and stop it. We need to experience some distress, more of a dose of reality, to get buyers and sellers together. Trades will start happening more at current fundamental prices. That’s not necessarily good news, but it will bring in opportunistic money and get things going. We are just muddling our way through now. That’s our policy now. We’re looking a lot like Japan."
