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March 27, 2009 – Comments (0) | RELATED TICKERS: SPG , VNO , MAC

US programs seen too late to stem foreclosure wave

"The delinquency rate among CMBS loans, which hit 1.8 percent
in March, could rise to 3.5 percent by the end of the year, and
6 percent next year. CMBS loans comprise about 20 percent of the
outstanding U.S. commercial real estate loans. * Commercial real estate prices may fall 35-45 pct from 07 peak"


Market News

By Ilaina Jonas NEW YORK, March 26 (Reuters)

- The new federal programs to
aid the U.S. financial markets will likely not fend off the
impending wave of foreclosures on U.S. commercial real estate
loans, experts said. U.S. Treasury Department officials unveiled this week more
specifics of a program that will enable the federal government
to help private buyers purchase toxic loans and asset-backed
securities, including commercial mortgage-backed securities
(CMBS). While there is much public debate about whether it will get
the banking industry back on its feet, many real estate experts
said that it won't prevent an approaching wave of defaults of
current loans in the U.S. commercial real estate sector "This isn't designed to head off foreclosures," said Thomas
Barrack Jr, head of real estate private equity firm Colony
Capital, which has $36 billion of assets under management. "This
is designed to start the banks lending." The U.S. commercial real estate boom that started around
2004 and peaked in 2007 was fueled by cheap debt. Banks and
other lenders were often willing to lend up to 90 percent or
more of the purchase price. The loans often assumed optimistic
rent growth and rising occupancies in the future. Borrowers and lenders assumed that the loans, often
interest-only, would be repaid by property sales or by new loans
that would more than cover the principal due. But the market began to collapse in the second half of 2007,
when the credit markets froze. Now borrowers are finding
themselves squeezed as older loans come due and there is little
lending to support sales or refinancing. About $814 billion in commercial mortgages -- for apartment
houses, office buildings, shopping centers, warehouses and
hotels -- are expected to mature this year through 2011, with
$250 billion due this year, according to Foresight Analysis. That means borrowers will have to raise more equity, which
is expensive, or lenders will have to foreclose or extend loans,
hoping values will rise again. "The myth has been that commercial is far more solid than
residential," said Robert White Jr, president of Real Capital
Analytics. "We were all patting ourselves on the back, that we
weren't overbuilding." AS BAD AS THE HOUSING BUST Those cheery days seem long past. U.S. commercial real estate prices are falling at a similar
rate to residential, down about 17 percent year over year,
according to Real Capital Analytics. Sales volume for commercial real estate was down 80 percent
in February because of the inability to get a loan and the wide
gap between the prices buyers and sellers want. U.S. commercial real estate prices may fall 35 to 45 percent
from their peak, exceeding the declines of the painful downturn
of the early 1990s, according to Richard Parkus, head of CMBS
research for Deutsche Bank. Rent declines and vacancy rates may
approach those of the early 1990s. The aim of the U.S. Treasury plan is to get banks to start
lending again by clearing away bad commercial real state loans.
When pension funds, private equity firms and life insurance
companies are able to sell off their devalued CMBS bonds, they
will be willing to buy newer, better-quality loans. The plan's specifics sent the CMBS on a three-day rally, and
helped boost the overall stock market. "By clearing out some of the inventories, the theory is they
will have more capacity to make new loans ... probably," said
Fredric Leffel, senior vice president of the U.S. arm of real
estate advisory firm Savills Plc. But by the time the banks start lending again, they are
likely to be more conservative. The loans will likely cover less
of the value of the property to be acquired and that value is
likely to be lower, leaving much of the expiring principal
uncovered. "The problem with the foreclosures is that anyone with any
real estate today may own it at less than 50 percent of the
value that it was two years ago," Barrack said. "That problem
isn't going to go away." The delinquency rate among CMBS loans, which hit 1.8 percent
in March, could rise to 3.5 percent by the end of the year, and
6 percent next year. CMBS loans comprise about 20 percent of the
outstanding U.S. commercial real estate loans. Among banks and other institutional lenders, the default
rate was 1.8 percent in the fourth quarter of 2008, according to
Real Estate Economics. The research firm expects that to jump to
3.9 percent by the end of the year, 4.7 percent by the end of
2010, and peak at 4.8 percent in 2011. In addition to the refinancing problem, U.S. commercial real
estate owners are wrestling with the recession and rising
vacancy rates, lower demand and decreasing rents that have
accompanied it. But those concerns, however great, are dwarfed
by the shortfall funding available to refinance past loans. "While obviously fundamentals have deteriorated, the much
bigger problem is the maturity problem," Leffel said. So what will the federal program do for the commercial real
estate industry? "It will lessen the erosion of values," Leffel said. "It
will smooth things out, particularly if you can get financing
back into the market, and to that extent it does help the
(Reporting by Ilaina Jonas; editing by Patrick Fitzgibbons and
Matthew Lewis)

© Thomson Reuters 2009 All rights reserved

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