RCA in the commercial property press:

Whose Fault is Tight Commercial Property Lending?

Reuters reports: In early December, Simon Property Group, the largest US real estate investment trust and mall owner, obtained a slightly larger revolving credit facility to replace an existing one.

Curiously, the existing $3.5 billion credit line was not due to expire for more than a year. So what's the rush?

"There was and is a fair bit of uncertainty in the bank market," Simon Chief Financial Officer Stephen Sterrett told Reuters, citing recent bank failures. Simon has a strong credit rating of "A minus," which affects the company's ability to borrow.

"Allocation of capital by the banks is becoming very precious," Sterrett said.

Many commercial real estate borrowers are saying the same. But banks disagree. Lenders including Bank of America Corp, the largest US bank, have said demand for loans is shrinking. Wells Fargo & Co's Chief Executive John Stumpf earlier this month said finding attractive loans and other assets will be one of the biggest challenges for banks next year.

"The problem is not lack of credit, it's the lack of bankable borrowers," said Richard Jones, partner and co-chair of the finance and real estate group of law firm Dechert LLP.

Banks, slammed by more than $1 trillion in writedowns and credit losses since the beginning of the financial crisis, have become more cautious lenders.

"Enough of the banking community is not just risk averse, they're fighting the last war," said Tom Mitchell, a banks analyst at Miller Tabak & Co.

Banks have become particularly wary of commercial real estate lending, which has been hit by the double whammy of falling property values and a severe recession that has hurt the income streams of many properties.

While the financial crisis had its roots in the US residential housing bust, some bank analysts have cautioned that the $3.4 trillion in US commercial real estate loans maturing over the next several years could be the next train wreck slamming into banks.

From about $1 trillion in commercial real estate loans originated at the height of the property boom, about $120 billion in writedowns have been taken and more than $300 billion have yet to be written down, Mitchell estimated.

The US commercial real estate boom, which began around 2005 and quickly crumbled in the second half of 2007, has ripped the value of many buildings. Since the market peaked in October 2007, prices have fallen 43.7 percent, according to Moody's/REAL Commercial Property Price Index.

In 2009, property sales over $5 million of the four main types of US commercial real estate -- office, industrial, retail and apartments -- totaled $43.86 billion, down 67 percent from last year and 90 percent from the peak in 2007, according to Real Capital Analytics.

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Posted by: Matthew Stone

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