Successful investment in any area — and that includes commercial real estate — means managing risk. To do that, you have to know not only that it exists, but whether investments are making it worth your while, depending on risk tolerance.
CRE debt is an area throwing off plenty of worry at the moment. After a too comfortable stretch at easy money and credit terms, reality has kicked back in. Cap rates are up, as are interest rates. Property values are falling, rent increases are leveling off, and lending standards are much tighter.
The risk of defaults and loss is up. As Green Street recently noted, if investors want to know whether they're getting an adequate risk premium in CRE markets, one way of doing so is looking at the spreads between liquid CMBS securities and corporate bonds.
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