RCA in the commercial property press:

Commercial real estate crisis threatens recovery

Atlanta Journal-Constitution reports: The Federal Reserve has limited options since it has doubled the size of its balance sheet and taken unprecedented action in monetizing government debt to deal with the credit crisis over the past year.

Now, it is faced with managing the dual challenges of shrinking the money supply to head off inflation and extricating itself from more than $5 trillion of credit exposure from the bailout programs instituted so far.

At the same time, the U.S. Treasury Department is on a path to continue funding government bailouts and budget deficits by issuing debt at the fastest pace in peacetime history.

So what is Washington going to do about the second wave of the credit crisis caused by the unfolding collapse in commercial real estate and the potential explosion of bank failures across the U.S.?

A bailout of bank deposit insurance seems inevitable. The question is what can Congress, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency do to mitigate this rapidly unfolding problem?

Commercial real estate, valued at some $3.5 trillion, has experienced a 39 percent decline in prices from the peak only two years ago, according to the MIT Center for Real Estate.

This drop is greater than the 27 percent commercial real estate decline associated with the longer savings and loan crisis of the late '80s and early '90s that precipitated government Resolution Trust Corporation seizures and auctions.

The same conditions that caused the residential bubble — including the Fed’s easy credit, lax lending standards and booming mortgage-backed securities underwriting on Wall Street — also drove commercial real estate overvaluation.

The 18 percent price decline in second quarter was the largest quarterly drop in the 25 years since MIT first published the commercial real estate price index. Most commercial properties bought or refinanced in the last five years are now upside down on their loans — with current property prices having fallen below the finance or purchase price. Real Capital Analytics reports that owners have lost their entire down payments on about $1.3 trillion worth of property.

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Posted by: Matthew Stone

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