Commercial Mortgages Approach a Record Best Not Broken.

New York -- Commercial mortgage loans now represent a record 15% of gross domestic product, and this record is likely to be broken soon, causing concern for Moody's Investors Service.

The credit rating agency reports that the 15% peak was last reached in 1988, at the height of the last real estate cycle, and cautions that "some records are best not broken."

Tad Philipp, Moody's managing director for commercial mortgage-backed securities, said, "Given the tremendous momentum in commercial mortgage lending, the record is almost certain to be broken shortly."

In the most recent 25 years, which represents the more modern period of real estate finance, the average for commercial mortgages outstanding as a share of GDP is 12.2%, Moody's said.

"Assuming that 12.2% represents a normalized level, the current 15% mark suggests that the present market is out of balance by almost 25%," Mr. Philipp noted.

He observed that while much of the excess capital that flowed into commercial mortgages during the last cycle went into construction lending, this time around it is being deployed mainly into additional debt on the existing stock of properties.

Mr. Philipp believes that the return of capitalization rates, or the returns expected by investors from real estate investments, to their lowest levels in 40 years accounts for some of the excess capital getting into the sector, even in the absence of a construction boom.