"We believe that valuations will rebound off the bottom andsettle in for the longer term at levels 30%-40% below the markettop as liquidity and investors return to the sector and propertycash flows begin to recover," says Nick Levidy, managing directorof Moody's, in a release. Titled "Moody's Outlook for US CommercialReal Estate and CMBS," the report predicts a slow rebound on cashflow, hand-in-hand with a growing refinancing risk on CMBS asmaturities on the bonds draw nearer.

Tying in with the approaching maturation of CMBS--and whatMoody's and others predict will be a steady increase indelinquencies on the securities--the Moody's report says there willbe further downgrades of up to three notches for many subordinatetranches of conduit/fusion bonds issued between 2006 and 2008.However, ratings on the most senior bonds will likely stay wherethey are, the report says.

The report presents both base-case and stress scenarios inanalyzing expected losses and ratings for conduit/fusion CMBS.Currently, average realized losses for CMBS deals issued between2003 and '08 are currently less than 0.2%, but Moody's says thatunder its base case, the numbers will range from just over 2% tojust under 6%, "depending on the vintage." Under the stressscenario, bonds below the original mezzanine AAA class in 2006-2008vintage deals would be downgraded to very low speculative grade orimpairment.

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Paul Bubny

Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.