Weak Economy and Lack of Credit Hobble Commercial Real Estate

WASHINGTON, DC - May 15, 2009 - (RealEstateRama) — Credit availability and refinancing issues have seriously affected commercial real estate markets, but recent actions by the Federal Reserve may help ease the crisis, according to presentations at a commercial real estate forum yesterday at the Realtors® Midyear Legislative Meetings & Trade Expo.

National Association of Realtors® Chief Economist Lawrence Yun said a commercial downturn is in the early stages. “Commercial real estate is the hardest hit industry outside of the auto industry,” Yun said. “A recovery in commercial real estate always lags a general economic recovery, but with the right policy prescriptions we can recover more quickly.”

While the commercial and multifamily real estate industry plays a vital role in the economy, it has been facing its worst liquidity challenge since the Great Depression. Hundreds of billions of dollars in commercial loans are expected to mature this year, and more than $1 trillion will mature over the next few years.

Without greater liquidity, commercial borrowers would face a growing challenge of refinancing debt, with a threat of rising delinquencies and foreclosures that could cause widespread damage to the overall economy. Over the past year, commercial investment transactions have essentially ground to a halt.

Yun said that commercial loan delinquencies had been stable at about 1 percent, but have risen recently to about 5 percent due to a lack of refinancing activity. “Right now cash is king, and buyers with cash are in the best bargaining position,” he said. “With so few transactions taking place, a pent-up demand may be building.”

Yun said commercial fundamentals are weakening but are better than in the last downturn in the 1990s. “NAR engaged with the Federal Reserve to buy commercial mortgage-backed securities via Term Asset-Backed Securities Loan Facility (TALF) and Troubled Asset Relief Program funds to restore some credit to the market,” Yun said.

In response to the liquidity crisis, the Federal Reserve Board recently announced that starting in June, commercial mortgage-backed securities will be eligible collateral under the TALF. The FRB also authorized up to $100 billion in TALF loans with five-year maturities to help investors finance CMBS purchases. TALF loans currently have maturities of three years.

NAR, which had been advocating extension of the maturity terms, is also asking Congress to enhance federal tax policies that strengthen the commercial real estate market, such as maintaining the capital gains tax rate at 15 percent. “Raising the capital gains tax would have the effect of lowering commercial property values, so we’re hopeful they’ll leave it where it is,” Yun said.

For transactions in the current market, Yun said small local banks and savings and loans are a good source of commercial credit. “Many small banks are in good shape and have the capacity to lend.”

NAR’s forecast for four major commercial real estate sectors is being revised and will be released with the Commercial Leading Indicator on May 20.

Robert Davis, executive vice president for mortgage markets and financial management at the American Bankers Association, said the market is in an unusual cycle. “It’s paradoxical – banks did better than expected in the stress tests and most are well capitalized,” he said. “A huge problem for lending from the collapse on Wall Street has been the modeling for risk management. They don’t know how to price risks, and this led to the collapse in liquidity.”

Davis said that confidence must be restored in discerning the market. “When people believe the pricing that comes out of the models, we’ll have an increase in liquidity. As banks stabilize, they’ll be able to offer more balance-sheet lending.”

Banks are being restrained by regulators who have been reluctant to allow much new lending. “We need progress in accounting rules. Regulators should look at cash flow rather than credit ratings in determining capital reserve requirements for a particular bank,” Davis said.

“Having a steady state of uncertainty is a prelude to recovery,” Davis said. “The longer we are in a situation with no surprises, the closer we are to returning to a normal state of lending. We shouldn’t over-trust technology in the lending market – we need to re-establish modern finance with better modeling.”

The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1.2 million members involved in all aspects of the residential and commercial real estate industries.

 

 

 

USGBC - U.S. Green Building Council

HUD - U.S. Department of Housing and Urban Development

NAR - National Association of REALTOR

RealtyTrac

FHFA - Federal Housing Finance Agency

Freddie Mac

MBA - Mortgage Bankers Association