Subprime specter hovering over commercial market.

The growing problems in the subprime lending industry could stretch beyond the residential real estate market and impact the soaring run up of commercial real estate values in recent years, finance experts say.

Subprime mortgages have frequently been bundled in portfolios of securitized debt, such as collateralized debt obligations, that are popular repositories for all types of real estate loans.

But as mortgage defaults in the subprime industry have increasingly translated into losses in the CDO market, some analysts predict a sector-wide repricing of risk that could drive up the cost of financing for commercial real estate.

Already, experts say that returns have risen for CDO bonds backed by riskier debt.

"If you look at the cost of triple A minus bonds and triple B minus bonds, the spread has grown since the trouble in the subprime market," said Mark Zandi, chief economist for Moody's Investor Services.

Such spreads had shrunk to historic lows in recent years amid an unprecedented glut of capital from around the globe and the perceived safety of real estate investment. The abundance of such inexpensive debt, along with the newfound popularity of commercial real estate as an investment class, boosted the pricing and liquidity in the sector.

But as the subprime meltdown balloons, investors may become wary of buying certain tranches of securitized debt, regardless of its collateral.

"When the Russian Debt Crisis, happened you saw lenders unwilling to lend for a property in Kansas City, which had nothing to do with the crisis," said Tad Philipp, a managing director at Moody's who rates CDO bonds. "There's the sense that, if something big happens, it spurs a pullback."

A subprime collapse could also threaten the economy because of its potential impact on an already cooling residential market. Consumer spending, which drives two thirds of the country's economic activity, has been fueled in part by the sharp escalation of home prices in recent years. Homeowners have converted the gains into cash with second mortgages.

But that strategy was often predicated on a continuation of appreciation in the residential market, which allowed consumers to cover the cost of their debts by selling their homes.

But as a growing number of homeowners have had trouble keeping pace with the often-steep interest rate hikes that come with subprime loans, so too have foreclosure rates risen across the country.

The trend has increased the supply of houses on the market, putting further weight on real estate prices that have already begun to sag.

The slowdown wouldn't be good news to the commercial real estate industry, whose success depends on the health of the economy.

Such concerns for the farther-reaching repercussions stemming from the subprime collapse could also have an effect on risk returns for securitized debt backed by real estate assets.

Commercial real estate is typically a highly leveraged investment and its pricing would likely sink, experts say, if portions of its debt became more expensive.