Fitch: Loosening Of CMBS Underwriting Could Make REITs Volatile

Changes in the availability, pricing and underwriting stringency of commercial mortgage-backed securities (CMBS) financing could affect real estate investment trusts (REITs) directly and indirectly, according to Fitch Ratings.

In the near term, the CMBS financing market's acceptance of pro forma assumptions may be indicative of increased risk appetites, improving the already strong liquidity of REITs and driving additional cap rate compression in secondary asset classes/markets that are more dependent upon CMBS. Over the longer term, however, continued usage of pro forma assumptions will ultimately increase the uncertainty and volatility of CMBS performance and, therefore, the requisite spread to compensate for the risk, Fitch explains.

In addition, a boom-or-bust cycle for CMBS loan performance would negatively affect REITs that regularly access the CMBS market, seek to sell to entities that finance the transactions with CMBS, and/or increase the volatility of and perception of risk for commercial real estate.


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