Commercial real estate gets worse
USA Today reports: The commercial real estate downturn is deepening, threatening to slow the economic recovery.
To try to contain the damage, the Federal Reserve said Monday that it will extend into 2010 a program to help investors buy commercial property loans. But some say that will have limited impact.
"We seem to be nearing the end of the recession but the situation in the commercial real estate market is getting worse," says Patrick Newport, an analyst at IHS Global Insight.
About $83 billion of office, retail, industrial and apartment properties have fallen into default, foreclosure or bankruptcy this year, says research firm Real Capital Analytics. The default rate for commercial mortgages jumped from 1.62% to 2.25% in the first quarter and should hit 4.1% by the end of the year, says Sam Chandan, president of Real Estate Econometrics. The carnage will likely cut half a percentage point off economic growth this year and in 2010, Newport says.
Fueled by easy credit, developers built too many shopping malls and office buildings from 2004 to 2007. As the economy soured, vacancy rates rose. Property values are down about 40% from their 2007 peak, Deutsch Bank says, and loans for commercial properties have come to a virtual standstill.
Hundreds of smaller regional banks, which are heavily exposed to commercial mortgages, could go bankrupt the next two years, Newport says.
Unwilling to seize devalued properties in a moribund market, lenders have foreclosed on fewer than 10% of the loans, says Real Capital Analytics.
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Posted by: Matthew Stone