The Commercial Real Estate Alpha Site

By LINGLING WEI

Demand is expected to be strong Monday for the first sale of commercial-mortgage-backed securities under a government rescue program designed, in part, to ease the mounting stress in the commercial-property sector.

But the strong demand is partly a reflection of the conservative underwriting of the $400 million in bonds backed by 28 Developers Diversified Realty Corp. shopping centers, in terms of the quality of the assets underlying the loan and the loan amount relative to the value of the properties. While the deal may help reopen a vital funding source for some commercial-property investors, it will likely provide little solace to owners of tens of billions of dollars of office buildings, shopping centers and other commercial real estate that are now worth less than their mortgages.

The deal is the first issue of commercial-mortgage-backed securities under the Federal Reserve’s Term Asset-Backed Securities Loan Facility, or TALF, program. Under the program, investors can borrow from the Fed as much as 85% of the CMBS bonds’ value by pledging the securities as collateral. By taking advantage of that leverage, investors will be able to boost their returns.

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