SOURCE: Wall Street Journal

According to an article in the August 1st WSJ Online, the fuel behind the skyrocketing commercial real estate prices of the past three years -- cheap debt and easy lending terms -- is running low. As a result, high-risk buyers might be left behind and the pace of real-estate companies going private might slow.

Moreover, these low-cost loans with lenient terms have propelled the commercial real estate market to what many feared was an unsustainable level. The boom was propped up by the commercial mortgage backed securities markets, which allowed banks to issue mortgages, pool them and sell them as bonds.

With less risk on their books, banks were able to lend with cheaper rates and looser terms, making it easier for private-equity firms to buy huge portfolios and real-estate investment trusts. The buying frenzy culminated in Blackstone Group's landmark, $23 billion acquisition of Equity Office Properties Trust in February. Many of those EOP properties were quickly flipped at even higher prices.

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In the past few weeks, though, nervous buyers of these commercial securities have pulled out of the market altogether or demanded sharply higher yields, fearing that many transactions were too risky. That has forced lenders to raise interest rates, increasing the cost of buying real estate.

Investors are fretting over the commercial sector despite strong fundamentals because they see similarities to problems that led to the crash of the subprime residential-mortgage market. This spring, the credit-ratings services issued warnings about lax underwriting standards on commercial loans.

Throughout the boom, many buyers borrowed 85% or more of the total costs of their acquisitions. Many of these loans were underwritten either with the presumption that rising prices would allow buyers to flip the properties for a profit or that future rent increases would offset the high mortgage payments.