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Commercial Real Estate Gets a Fed Jolt

NEW YORK ( TheStreet) -- The Federal Reserve Bank of New York's sale of $7.5 billion of once-toxic commercial real estate debt last week is being applauded by investors as a slam dunk that may revive the moribund sector.

"It was very well received," said Edward L. Shugrue III, CEO of commercial real estate advisory firm Talmage. "It was a thoughtful and adroit move by the Fed and the timing was impeccable."

Last week the Fed said that it had sold an entire portion of American International Group's (AIG - Get Report) debt -- known as MAX CDO" -- to a group of bidders that included Barclays Capital (BCS) and Deutsche Bank (DB - Get Report). The CDO (short for collateralized debt obligation) consisted of a large bundle of commercial mortgage-backed securities (CMBS) debt wrapped up into a single security that eventually went south on AIG.

The MAX CDO was purchased away from AIG during the height of the financial crisis, and the sale is part of a bigger government auction of AIG debt taken on by the Fed called the Maiden Lane III transactions.

Shugrue said the sale of MAX CDO -- and the subsequent flood into the commercial real estate market of its parts as Barclays and Deutsche Bank break it up -- proves that commercial real estate debt may be ready for a comeback as investors search for higher yielding products.

"Until this week the net supply of CMBS has been shrinking, but this sale proves that there is rich demand across the sector," Shugrue said. "The risk trade is on, and banks, money managers and hedge funds were eager to snap this up."

A report issued by Barclays last week echoed Shugrue's assertion that investors were ready to take on more commercial real estate debt. "For this week at least, it looks as if the CMBS market has been able to take down much of this new supply with little effect on prices."

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