One of the most popular debt vehicles is commercial mortgage-backed securities. CMBS issuance grew to nearly $190 billion worldwide as of Sept. 30, up 20% from $158 billion a year earlier. So far, close to $1 trillion has been issued worldwide over the 13-year history of the CMBS market.
And CMBS are only issued on core real estate. The securities are a form of bond that requires a consistent cash flow stream, Mr. Mundt explained.
The expected level of debt on core strategies now is between 20% and 40%, the report noted, citing data from Real Estate Research Corp.
That means there is "less margin for error" should the economy falter — as the study's authors expect — within the next two years, he said. "In the search for alpha and to get higher returns, people turned to the debt markets seeking those higher returns," he said. "This works when the values are going up."
If anything interrupts the increasing cash flows, property owners may have a difficult time paying the debt, he said.
"We think the segment of the lending market most at risk is the CMBS market, and we think there is a good likelihood over the next two or three years … there will be an uptick in default and delinquencies, with a lot of it in CMBS and mezzanine," Mr. Mundt said.