Moody's: CRE Cap Rates 'Out of Synch'

A disconnect between the price of commercial real estate and its revenue stream is on the verge of becoming a problem for commercial mortgage-backed securities, according to Moody's Investors Service.Capitalization rates are comparable to price-to-earnings ratios in the stock market, Moody's said. "The cap rate drives the loan-to-value ratio, one of the two key loan-level credit tests," said Tad Philipp, Moody's managing director for CMBS and co-author of the Moody's report. Low capitalization rates have been pushing up property values, despite weak fundamentals affecting rents and the leasing of commercial property. If cap rates or interest rates on commercial mortgages were to rise, it would increase the risk that borrowers will have difficulty refinancing commercial mortgage loans at the end of their term, Moody's said. Moody's can be found on the Web at http://www.moodys.com.