Trying to prosper by simply rolling over debt continually is no longer viable.Two years after fissures in the residential housing market gave way to a national collapse of home prices and sales, experts warn that the commercial real-estate market is the next shoe to drop, bringing more woes to the battered economy.
Thousands of commercial mortgages valued at hundreds of billions of dollars are approaching their renewal dates, and by some estimates, two out of three no longer will meet the original loan conditions and won't be able to refinance. With prices for commercial properties expected to plunge, a vicious cycle could unfold, much as it has in the nation's housing market.
"It's the next wave to hit. It's the next round of bad news," said Scott Talbott, the senior vice president of government affairs for the Financial Services Roundtable, a trade group for big banks and other financial institutions who are collectively concerned about the coming problems.
The Bad: Forecaster Moody's Economy.com expects $375 billion in losses on the $3.5 trillion in commercial mortgage loans and securities outstanding. That's a loss rate of about 11 percent, nearly twice the rate of home mortgage foreclosures, and the forecaster thinks that about $200 billion of those commercial losses are still ahead.
The Not So Bad: No doubt there is some cause for concern. But commercial real estate has a different dynamic. Commercial real estate generates cash flow which residential properties do not. That cash flow has always been influenced by changes in the business cycle. Even in foreclosure a commercial property could still be earning rent. Sure, business closings could leave building owners with vacancies (no cash flow then). But that's always been a risk in commercial buildings. Commercial properties, with their shorter terms and their underlying funded foundations, are expected to adjust according to supply and demand.
This could be a problem for the smaller banks in the coming years.
Source: McClatchy
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