The Real Estate Market – it’s treading water and its feet can’t quite touch the bottom, but it feels close, really close – toes stretching to locate anything firm that it can stand on. Then the Mortgage Bankers Association (“MBA”) reports that Commercial Mortgage Backed Securities* (“CMBS”) third quarter delinquency rates rose and are projected to increase by 6% in early 2010. U.S. CMBS: Moody’s CMBS Delinquency Tracker, December 2009.

The current economic downturn has severely increased investor concern over the state of the CMBS market and that appears to be bad for the overall recovery in commercial real estate.  Plunging consumer confidence coupled with lower stock market valuations, weak consumer spending, slower GDP growth, and rising energy prices all adversely affect commercial real estate values.  Reduced demand for space drives occupancy downward, rents dematerialize and net operating incomes deteriorate.   Loan values continue to downgrade and cash flows continue on a downward sloping incline.   In turn, investors price those real estate cash flows more conservatively – the value of real estate falls and with them the value of CMBS paper.  So recovery in the commercial real estate sector may lag the broader economy, with operating cash flows expected to continue to decline across all property types over the next 18 months to two years – ouch.

So it seems that the bottom is not that close after all.   The question is whether we can expect to see transactions creep up as the bottom nears?

Bank of America Corp thinks so.  BOA just sold a $460MM offering without government backing (TALF) for the first time in more than a year.  Of course, it promised a sweetened return, but nonetheless, the deal was proferred and purchased     “It’s a success to get the first deal without TALF done,” said Tony Butler, managing director of RAIT Securities. See, The Wall Street Journal “BofA Tosses Aside TALF Crutch”, December 9, 2009. In other words, the market took its first step in a long, long time without cruches…and the leg held.

So there is good news within the bad news which is that the bad news is getting less bad.  That’s good.

*Commercial Mortgage Backed Securities are a collection of single mortgage loans aggregated in a “securitized” pool, and then placed in a trust. The trust issues a series of bonds that are sold to investors. Pooling the loans allows bond investors access to risk vs. reward combinations that would otherwise be unavailable to them when investing in individual loans.  It also decreases their risk by creating a diverse range of property types, sizes, and markets.