Commercial Real Estate Industry Seeks U.S. Aid
Tuesday, December 23, 2008
Some of the country's biggest commercial real estate players are asking the government for help, as their $6 trillion industry of hotels, office buildings and shopping malls faces a record amount of debt coming due in the next few years.
Trade association executives said that in the last few weeks they have met with members of President-elect Barack Obama's transition team, Congressional leaders, and officials at the Treasury Department and Federal Reserve to make their case for assistance.
In the next three years, they pointed out, an estimated $530 billion of commercial mortgages will come due for refinancing -- with about $160 billion due next year, according to Foresight Analytics, based in Oakland, Calif. But with the credit markets virtually collapsed, thousands of those properties could go into foreclosure or bankruptcy if owners are unable to get new loans.
"If you can't get a loan and you owe the bank the money, you have to find the cash to pay the loan back or you default on the property," said Steven A. Wechsler, who has been lobbying as president and chief executive of the National Association of Real Estate Investment Trusts, a D.C. association with 3,000 members. "Banks' jobs are to make loans, not own real estate. That's something we'd like to avoid. It could be a downward spiral that's driven by a compromised system of credit delivery. Some constructive step by federal policymakers would be wise and appropriate to be able to free up the market."
The real estate industry is going to the government for help because "they can," said Jim Sullivan, a managing director at Green Street, a real estate research firm in Newport Beach, Calif.
"They see what everybody else has gotten," he said. "Real estate is a capital-intensive business and there is no capital. They'll take cheap money from whoever is giving it out, and now there's only one source -- the government."
The trade associations are asking that their members be included in a $200 billion lending facility that was created by the government to support the market for consumer debt such as car loans, student loans and credit cards. In a recent letter to Treasury Secretary Henry M. Paulson Jr., industry leaders from a dozen groups described the troubled situation. "The paralysis of credit, which began in the short-term market, has coursed through the system and it now severely affects longer-term credit, especially secured and unsecured commercial real estate loans," they wrote.
When Paulson announced the $200 billion initiative, he noted that it could possibly be expanded to aid the commercial real estate market.
The real estate groups say they aren't asking for direct bailouts for their members, but rather for credit market support. "This is the same thing they're doing for car loans and student loans. We're asking them to help restart the credit markets for commercial real estate mortgages," said Jeffrey D. DeBoer, president and chief executive of the Real Estate Roundtable, a major industry trade group.
"Banks can't possibly absorb, manage and turn around properties at this scale if they come back to the lenders," he said.
The commercial real estate market boomed in the last few years, fed by easy credit. But starting in mid-2007, the credit crisis essentially froze the securities market.
The amount of new commercial mortgage-backed securities -- loans that are sliced, packaged and sold as bonds -- fell from $200 billion in 2007 to only $12 billion in the first six months of the year, Wechsler said. "We've gone from 55 miles per hour to zero," he said.
When money was flowing, investors drove up the prices of real estate, betting that rents and occupancy rates would keep going up. But cash from properties is falling as more space becomes available and rents drop, making it harder for owners to repay their debts.
While delinquency rates are low, they increased by one-third in November to 0.96 percent and could rise to more than 3 percent by the end of next year, according to figures from Deutsche Bank. Atlanta, Detroit, New York and Tampa are among the markets showing signs of rising defaults. In the Washington region, defaults are below the national average.
"It won't help the economy if commercial real estate continues to fall like residential," said Lisa Pendergast, managing director of commercial real estate finance at RBS Greenwich Capital Markets. "Then ultimately it will cause the recession to lengthen and deepen."
Staff writer David Cho contributed to this report.