Downturn Pounds Commercial Real Estate
Jan 12th, 2009 at 10:04 am by Susie
And despite the tone of this article, some people believe it will be worse than the residential crash:
Contractors, investors and developers are bracing for what could be the worst real estate crunch since the early 1990s, when the industry built a small city’s worth of speculative office buildings that later went begging for tenants. Commercial property sales plunged 73% last year, according to Real Capital Analytics. Vacancy rates are rising, and hundreds of large properties are in default. The American Institute of Architects’ billing index, a leading indicator of construction six months ahead, is at a record low. Unemployment in the construction industry is 15.3%, well above the average 7.2% jobless rate.
The 1990s crisis was sparked by federal tax breaks that encouraged overinvestment and overbuilding. This time around, the real estate frenzy was fueled by cheap credit, which allowed investors and developers to bid up prices of existing properties. But the economic fallout could be similar: rising bankruptcies and unemployment and slower economic growth at a time when the economy is already reeling from a historic housing depression.
“This is a rolling problem that’s only going to get worse,” says Jeffrey DeBoer, president of the Real Estate Roundtable, estimating that about $400 billion worth of commercial real estate mortgages will come due by the end of 2009. Investors and developers might have trouble refinancing many loans, due to tight credit and falling rents and property values.
“Businesses need to be able to access the credit market when their debt comes due and their business needs require. Right now, they’re not able to,” DeBoer says.
The Roundtable is part of an industrywide coalition that’s pushing the Federal Reserve and Treasury Department to create a special lending program to resuscitate the commercial mortgage-backed securities market. The industry says such a move would provide liquidity and restore confidence to a sector of the credit market that has essentially frozen. The Treasury Department and Fed have not issued a formal decision, but Treasury noted in November that a similar program aimed at auto, credit card and student loan lenders could be extended to include commercial mortgage-backed securities.
[...] Though the problems in the non-residential sector of the real estate market aren’t likely to be nearly as calamitous as the housing market collapse, they could contribute to a deeper and longer recession. The non-residential real estate decline could shave about a third of a percentage point, or $30 billion, from U.S. economic growth in 2009, says Aaron Smith, senior economist at Moody’s Economy.com.
Okay. Scary statistic #1…+323 trillion dollars of commercial real estate adjustable mortgages are due to reset in 2009 (source: First American Corelogic). What does this mean when these commercial business cannot refinance? Hopefully Treasury Paulson knows what he is going to do before this becomes a huge mess.
Scary statistic #2…7 out of the top 20 counties that with commercial mortgage resetting are in Texas—Buckle up.
Salutations from Lansdowne !
It may be noted here that in my adult lifetime (OK, I’m 58), the ’square-feet-of-retail-selling-space* per adult American’ has almost tripled Mayhaps ’twas a misallocation of capital here ?
Are we going to see a ‘weeding out’ of chains - and competition - will Best Buy up its prices iwth Circuit City gone - certainly Pathmark has fewer bargains now that it’s part of SuperFresh
Youcs, John Desmond
*ie, not including the courts in the mall with fountain and benches…
We’re all aware of the calamitous mortgage crisis with consumers loosing their homes, bank foreclosures, the lending freeze and the rapid unraveling of the economy in general. Now the mortgage crisis is moving to Main Street and the commercial real estate market is taking a pounding.
Not too long ago, investors were jumping into the commercial real estate fast lane, buying up office towers, apartment complexes, hotels, shopping malls and any spec property that promised to reap rewards through escalating values. But now things are not looking so rosy for commercial real estate.
Contractors, investors and developers are facing what could be the worst real estate crisis since the early 1990s. The crisis in the 1990s happened when federal tax breaks led to overinvestment and overbuilding. But the impending crisis is the result of cheap credit, which tempted developers to bid up the prices of existing properties creating a price bubble.
Once again, banks are left holding the bag. In the second quarter of 2008, banks held more than 50% of commercial real estate loans, with smaller, regional lenders having a relatively larger exposure. Regional banks are now waiting for a second wave of loan losses to hit, this time instead of toxic residential debt, it’s shopping centers, hotels and major residential and commercial construction projects. The charge-off rate for these loans is about 1.1% and growing.
The number of overdue commercial construction loans is on the rise, which portends a rise in defaults. In the third quarter of 2008, overdue loans had quadrupled from two years earlier for the same period, according to Federal Reserve data. That’s the highest spike since 1994.
Jeffrey DeBoer, president of the Real Estate Roundtable estimates that about $400 billion worth of commercial real estate mortgages will come due by the end of this year. But since many banks have stopped lending to any new construction projects, developers will have a hard time refinancing the hundreds of billions in loans already on the books.
The Roundtable is part of a real estate affinity group that’s leaning on the Federal Reserve and Treasury Department to create a special lending program for the commercial mortgage-backed securities market. No decisions have been made, but Treasury did indicate that extending part of their financial bail-out package to this market sector is within the realm of possibility.
Meanwhile, major construction projects across the country are on hold. From churches where the membership is uncertain about spending funds, to universities that have seen their endowments collapse, to individual developers who aren’t willing to spend money in the current economic mess. Even architectural firms are feeling the pinch as skittish clients cancel large projects.
Even though the downturn in the commercial real estate hasn’t been as dramatic or as headline grabbing as pictures of homeowners sent packing, commercial defaults could deepen and prolong the recession. Moody’s Economy.com estimates that commercial real estate losses could slice about $30 billion from our economic growth this year.
Many in the construction industry are pushing Congress to approve President-elect Obama’s proposed stimulus plan to revive the economy and pour hundreds of billions of dollars into rebuilding the infrastructure. It could be enough to keep developers, construction workers, architects, engineers, heavy equipment manufactures and staff members employed and supplied with spending cash until the economy recovers.
But will Obama’s plan succeed in reviving the economy and boosting consumer confidence? Will he make good on his promise to spend those funds on rebuilding the country’s infrastructure? Will he even mange to get the necessary funds in the face of growing skepticism over missing money that banks received in the first stage of the bailout package? If things go according to plan, construction firms might be able to turn their attention to public works projects like bridges, roads and schools. When you consider the huge budget shortfalls of many states and municipalities, there appears to be a sizable backlog of projects in need of funding.