The signs are mounting that commercial mortgage-backed securities will be the "subprime story" of 2008. A startling report from Goldman Sachs has raised concerns that the losses caused by non-performing commercial mortgages will rival the losses related to subprime residential mortgages. According to Goldman Sachs, the bad commercial real estate loans may generate $183 billion in losses, compared with their estimate of $211 billion in damage caused by subprime mortgages.

The unwinding of the commercial real estate bubble seems to be following the exact path of the subprime collapse. In August 2007, French bank BNP Paribas announced it could not determine the value of its positions in collateralized debt obligations that had exposure to subprime mortgages. This admission was the tipping point for the subprime mortgage market. Any borrower seeking a non-conforming mortgage found financial institutions more hesitant to approve the loan. The reason, of course, was because these firms had simply passed the mortgages on to investors through one of many forms of private label mortgage securities. When investors balked at the risk embedded in these securities, institutions had no choice but to tighten the spigot at their loan origination desks.

A buyers' strike is also underway in the CMBS market. The Wall Street Journal recently reported that no new CMBS were issued in January 2008. The last time the markets saw such a shutout was in October 1990. Again, the reason behind this was not because developers suddenly don't need funding. Instead it's because investors do not want to assume the risks associated with exposure to commercial real estate loans. Tighter credit will force the hands of many commercial real estate developers, leading to foreclosures and losses for investors in CMBS.