A Ticking Time Bomb (CRE)

WASHINGTON -(Dow Jones)- Some lawmakers welcomed news Tuesday that 10 of the nation's largest banks are poised to repay billions of federal assistance but warned that a "ticking time bomb" in commercial real estate could deal a punishing blow to lenders and the economy.
"I am very concerned about the ticking time bomb we face in commercial real estate lending," congressional Joint Economic Committee Chair Carolyn Maloney, D-N.Y. said at a hearing Tuesday. She noted that an estimated $400 billion of commercial real estate loans are coming due this year, with another $300 billion due in 2010.

If commercial real estate developers cannot refinance or pay off that debt, " we could expect to see the default rate on commercial mortgages climb much higher," Maloney warned.
Maloney's comments came at a hearing into the $700 billion Troubled Asset Relief Program approved by Congress to help banks saddled with soured assets linked to risky home mortgage loans. Just before the hearing began, the U.S. Treasury Department announced that 10 recipients of so-called TARP funds will repay a total of $68 billion, which Maloney called "welcome news."

The hearing follows the release of a new Congressional Oversight Panel report on the TARP, which faulted recent "stress tests" of 19 large financial firms by the Treasury Department and the Federal Reserve, saying the economic assumptions probably were too rosy and that the projections only run through 2010.

"We simply are asking for more," Congressional Oversight Panel chair Elizabeth Warren told lawmakers. She recommended that the stress tests be run again, with tougher assumptions, and be continued as long as banks hold troubled assets.As a case in point, Warren noted that the U.S. unemployment rate projected for 2009 under the stress tests' "worst-case scenario" was 8.9%, but "we're now at 9.4%,"

"This is a real concern, the worst case scenario in 2009 is in fact not the worst case," said Warren, whose panel is monitoring the Treasury's spending of the bailout money.
In addition, the oversight panel called for regulators to issue more information about the stress-test methodology, allowing outside analysts to replicate the tests themselves. -By Judith Burns, Dow Jones Newswires

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Commercial Real Estate, A Lagging Indicator.

The US government's pumping up of the economy via various programs created by the nearly $800 billion economic stimulus package and interceding in the financial market will indirectly incite the revival of the commercial real estate market, according to a new report by Marcus & Millichap Real Estate Investment Services. But the major impact is unlikely to be felt this year. The present state of the commercial real estate market leaves a great deal of room for improvement. Marcus & Millichap notes in its report that sales volume, restricted by the gap between buyers' and sellers' pricing, has barely made a blip on the radar within the last six months. While the pricing disparity showed some signs of improvement in the first quarter of 2009 due to declining property fundamentals and the ongoing general inaccessibility of debt capital, there remains the issue of the impending maturity of commercial mortgages with which the industry must contend.

Approximately $218 billion of commercial mortgages will come due this year, followed by $270 million between 2010 and 2011, so while commercial delinquency rates were relatively low as the economy headed downward, the lag effect will soon come into play. The CMBS delinquency rate increased in the first quarter and is on track to increase even further to the 4 percent to 5 percent range by the close of 2009. Banks could see the delinquency figure climb to $53 billion, as indicated by recent stress tests.

However, the aforementioned stress tests have also revealed that, with the new federal programs coming into play, capital should become more easily accessible, thereby eventually spurring an uptick in commercial real estate conditions, particularly since the majority of property sectors avoided overbuilding as the downturn approached. Yet, visible change in the commercial real estate market, will trail economic recovery by about six to nine months. Improvement is on the way, but the impact of the federal stimulus package and financial market intervention won't be felt at its strongest until after the year has come to a close. As Marcus & Millichap notes in its report, one can look to the apartment and industrial sectors, which are most sensitive to job creation and increased consumption, to show the first signs of recovery. By Barbara Murray, contributing editor to CPN Online

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CRE - Rebound In Sight?

So the U.S. commercial real estate sector declined at the beginning of the year, according to the National Association of Realtors, which said on Wednesday its index of brokerage activity in the sector fell 4.8 percent in the first quarter from the fourth. Activity was also 12.9 percent below the first quarter of 2008, NAR said. "Significant job losses have reduced the demand for commercial space, while a lack of credit has stalled transactions and refinancing activity," said the association's chief economist, Lawrence Yun, in a statement.

Treasury Secretary Timothy Geithner said the keys are putting "more capital where it is necessary and getting the securities market back to the point where they can help refinance viable projects." The Federal Reserve has offered some relief by opening its $200 billion Term Asset Backed Securities Loan Facility to AAA-rated commercial mortgage-backed securities, he said. "The Fed announced yesterday a very important step that's going to extend this program to commercial mortgage-backed securities -- newly issued securities and legacy assets in that area," he said. "The market responded quite favorably because the availability of financing in those markets will help get those capital markets going again."

The NAR said commercial real estate activity, which encompasses the finished construction of buildings and their sale and leasing, will continue to decline for the next six to nine months. "Because commercial real estate always lags an overall economic recovery, it will take some time for the commercial real estate market to rebound," Yun also said. The association, which represents 1.2 million professionals in residential and commercial real estate, projected that vacancy rates in office buildings will reach 16.1 percent in 2009, up from 13.4 percent in 2008, and will rise again to 20.4 percent in 2010. Retail vacancy rates will likely increase to 12.1 percent in 2009 from 9.7 percent last year, and will spike to 15.8 percent next year, the association said.

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