“I expect it to get much worse in the next two years. This is really going to be the story going forward, probably by the summer. We’re going to be hearing more and more about problem commercial real estate loans,” said Scottsdale economist Jim Rounds.
Vacancies in commercial properties have skyrocketed, yet millions of square feet of commercial real estate are under construction and will be flooding the market in 2009.
“It’s kind of like getting punched when you’re already down. This is what’s going to happen in this economy, and I don’t think people are paying enough attention to it,” Rounds said. “It’s going to lengthen the downturn and make conditions in 2009 worse than they would have been.”
The pace of commercial construction also had slowed. A number of participants expressed concern that the commercial real estate sector could deteriorate sharply in the months ahead. They noted that a large number of commercial real estate mortgages will come due at a time when banks likely will still be facing balance-sheet constraints, the ability to securitize commercial real estate mortgages may remain severely restricted, and vacancy rates in commercial properties could well be climbing. Some participants worried that the outcome could be an increase in defaults on commercial real estate mortgages and forced sales of commercial properties, which could push prices down further and generate additional losses on banks’ commercial real estate loan portfolios.
Yeah, the other shoe is about to drop and it’s a size 16 EEE. The market for commercial mortgage backed securities, which are bondlike investments created by bundling up groups of commercial mortgages, is just about dead. These types of securities made up almost half of the recent commercial real estate loans. While this market for loans is stalled, banks and life insurance companies have seriously cut back on the loans they are willing to do. And their standards have significantly tightened. These lenders are requiring more equity and charging higher interest rates on loans.
Where landlords may have been able to get a loan for about 80 percent of a building’s value before, now many are looking at only being able to get financing at about 50 percent of value while facing the problem of depressed property values. Add that together with a standard of “balloon type” financing with principals coming due and you have a major problem. If the owners can’t refinance, it could lead to an increasing rate of distress sales as they’re forced to get rid of their buildings or face foreclosure. That will only accelerate the drop in the values of commercial real estate assets which may cause even more owners to be forced under the shoe.
Good comments Mike L in #1. For some further corroboration check out Mish’s discussion of the seismic changes occurring at the level of the consumer:
Many persons regard a loan as a windfall,
and cause trouble to those who help them.
A man will kiss another’s hands until he gets a loan,
and will lower his voice in speaking of his neighbor’s money;
but at the time for repayment he will delay,
and will pay in words of unconcern,
and will find fault with the time.
[6] If the lender exert pressure, he will hardly get back half,
and will regard that as a windfall.
If he does not, the borrower has robbed him of his money,
and he has needlessly made him his enemy;
he will repay him with curses and reproaches,
and instead of glory will repay him with dishonor.
[7] Because of such wickedness, therefore, many
have refused to lend;
they have been afraid of being defrauded needlessly.
-Ecclesiasticus 29:4-7 (RSV)