Bear Sterns Demise May affect Commercial Real Estate Market

Following the fire sale of Bear Sterns this past weekend, commercial real estate investors could see their lending pool shrink up. The sudden downfall of the 85-year-old investment bank could increase investors' fears about commercial mortgage-backed securities, or CMBS, a key financing vehicle for commercial real estate. In addition, Bear Stern's demise removes a once sizable player in the industry. Bear Stearns was a major underwriter of CMBS, and held some $16 billion of commercial real estate bonds on its books.

Despite the sub-prime problems of the residential market the commercial market has remained fairly stable the past few years thanks in part to CMBS, which are basically repackaged loans of commercial buildings that are sold to investors, much like residential loans are.

The problem began about a year ago when the housing market really began to see a turn down. Many lending institution's not only tightened their standards on residential underwriting but also on commercial underwriting amid fears that lending practices had been too loose on those loans as well.

With the liquidity of the CMBS market drying up and the number of players involved shrinking, it is harder still to effectively price the securities, in turn making investors more cautious.