Commercial Mortgage Crisis Continues

by Manhattan Beach Observer on June 28, 2010 in Blog, Commercial Real Estate, Economy

The commercial real estate (CRE) market peaked in 2007, and has been in a prolonged process of collapse ever since. This is true for asset valuations across CRE property types, equity risk premiums, and mortgage issuance. In a continuation of the CRE saga, Bank of America announced that over half of commercial mortgages have been unable to refinance as notes reach maturity.

Nearly $1.24 trillion of commercial mortgages need to be refinanced over the next four years. With so much debt outstanding and in need of refinancing, the BofA announcement makes a bad situation far worse.

Between 50 percent and 60 percent of loans on skyscrapers, hotels, shopping malls and apartment complexes failed to refinance within a few months of their maturity date this year, Bank of America Merrill Lynch analysts said in a report.

As a comparison of present conditions to what went on during the boom years, we should note that a record of $251.1 billion in bonds tied to commercial mortgages were issued in 2007 compared to $1.7 billion issued so far in 2010.

Commercial real estate firms are increasingly desperate. According to Thomson Reuters there are at least 12 CRE firms planning to sell equity in IPOs over the next year. Given that equity sales earlier this year have either completely failed to materialize, or have been executed at deep discounts, it is not likely that CRE firms will be able to re-capitalize properties that have decreasingly profitable operating margins.

Without a big government bailout, the 41 percent CRE decline since 2007 might just be the start of something much worse.

5 Responses to “Commercial Mortgage Crisis Continues”

Jeff Guilfoyle July 8, 2010 at 10:24 am #

Many property owners are in trouble right now, with nothing to look forward to but loosing their property. Some have found away to keep their property and even lower their payments and increase their terms.
You can sit on the side lines or due something about it.

http://jag.commercialrelief.com

Reply
Jeff Guilfoyle July 5, 2010 at 10:33 am #

I regulation is not the problem here. The times are to blame for many property owners problems. Many of the people out there are having trouble right now for many reasons. Banks at this time would rather rather negotiate the current note than add anything new to the books. If you can get a loan from them!
Some of us have found a way to help.

Reply
Eric Amzalag June 30, 2010 at 3:17 pm #

You think the government should get its hand involved in CRE as well? What could they do to resolve the situation without putting more regulation into the system?

Do you think there is another viable solution rather then government intervention?

Reply
- Rob Viglione July 2, 2010 at 9:36 pm #
  
  My personal take is that most government interventions are economically harmful in the long run; the same is true for supporting the CRE market, either on the equity or debt side.
  
  CRE values (like any asset) are predicated on balancing income expectations with risk and opportunity cost of capital. Government interventions can favor certain asset classes in the short term through income subsidies (from taxpayers), risk transfer (to taxpayers), and capital deprivation in other areas of the economy. None of these possibilities equate to a healthy economy.
  
  So, that being said, the best thing that regulators can do in CRE is to back off and let markets reset; let bad assets liquidate at valuations low enough to attract private capital.
  
  Reply