US Lawmakers Sound Alarm About Commercial Real Estate Market

[Purveyor]

Source: DOW JONES NEWSWIRES

By Jessica Holzer, Of DOW JONES NEWSWIRES

WASHINGTON -(Dow Jones)- U.S. lawmakers rang alarm bells about the troubled commercial real estate industry, which has been walloped by the credit crunch and an implosion of property values.

"The commercial real estate time bomb is ticking," Joint Economic Committee Chairman Rep. Carolyn Maloney, D-N.Y., said in opening remarks to a hearing before her panel Thursday.

U.S. Sen. Sam Brownback, R-Kansas, said he was distressed about the situation the industry is facing.

Banks have yanked back on lending to developers of shopping malls, apartment complexes, hotels and office parks. Meanwhile, the securitization market - a key source of funding for the commercial real estate industry - has been in a deep freeze since last year.

The situation is fueling concerns that property developers won't be able to refinance roughly $400 billion in commercial real estate debt coming due this year. Property values have plunged about 24% since their peak in 2007, further hampering developers' ability to obtain refinancings or loan extensions.

Read more: http://tinyurl.com/kk37tz

[Rage for Order]

1. The problem is much more accute in commercial vs. residential real estate

Generally speaking, the loans used to finance commercial real estate are short-term, interest-only loans that mature in 2-3 years. It is assumed that the property "owner" will find new financing at the end of the term, whether it's with the same bank that did the original loan or a different bank. Because it's such a short-term loan, the rate tends to be something like monthly LIBOR + a spread of 3%-4%, which ends up not being too high of a rate. In the meantime, the bank gets to charge underwriting fees every 2 or 3 years. The "owner" gets a reasonable rate, and the bank gets to generate new fees on the loan every few years. It's a win-win for all involved, until the capital markets dry up (like now). Then it's a monetary version of musical chairs, and the people left without a chair are royally screwed.

[FredStembottom]

2. Very helpful explanation.

Thanks much!

Question: How does this relate to the retail market and all the 50% empty strip malls that are now the norm?

Was there ever enough shopping demand to support what seemed like too many malls even in the boom years?

Or were retail stores just "place-holders" inside bigger, almost unrelated real-estate ponzi schemes?

...if you see what I mean.:shrug:

[Rage for Order]

4. The retail market is a bit different

In that it is much more dependent on people having disposable income with which to shop. Millions of job losses later, there are far fewer people with money to buy things at strip malls, and the people who still have jobs are being much more frugal with their money. Who can blame them? After all, their job might be the next one to get cut. In my opinion, the retail market is more about consumer confidence. A few years ago, everyone was over-confident in regards to America's economy, and retail space was overbuilt. Now there is virtually no confidence in America's economy and retail shops are suffering.

[Robb]

3. Vacancy rates were already climbing

...when these clowns financed new projects.

More commercial wasn't needed. They built it anyhow.

I refuse to feel anything for commercial real estate developers. Too many other groups are getting hit hard right now that I care about.

[Karenina]

5. Better late than never...

[benld74]

6. Gee looks like somebody went shopping and noticed what we already knew!

[Terry in Austin]

7. Save the developers

Oh noes, another endangered species...

:nopity: