Commercial Property Investments Turn Sour

The problems of the commercial property sector are getting worse, according to Real Capital Analytics, Deutsche Bank and other commercial real estate analysts.

Based on data from research firm Real Capital, about $83 billion worth of retail, office, apartment and industrial properties have gone into foreclosure, bankruptcy or default this year.

Also, according to Sam Chandan of Real Estate Econometrics, delinquencies on commercial loans have climbed up to 2.25 percent in the first quarter this year, up from the previous 1.62 percent. It is expected that the default rate would soar to 4.1 percent in the last months of the year.

According to IHS Global Insight analyst Patrick Newport, while the recession seems to be nearing its end, the commercial property sector is getting worse. He added that commercial mortgage problems would cut about one-half percentage point off economic growth rate in 2009 and in 2010.

During the four-year property boom ended 2007, developers built a lot of office buildings and shopping malls, pushing vacancy rates to record high levels when the property market collapsed. According to Deutsche Bank, real estate values have gone down about 40 percent below their peak levels in 2007 while commercial property loans have flattened.

Additionally, IHS analyst Newport said hundreds of small regional banks which have provided a lot of commercial property loans could become bankrupt in the next couple of years.

Lenders meanwhile have not been quick in foreclosing on delinquent commercial loans because of the sharp declines in property values. Real Capital Analytics said that less than 10 percent of all commercial loans have been foreclosed by banks. New York real estate attorney Edward Mermelstein said that delaying foreclosure means avoiding low property sales but also means prolonging the crisis.

Another reality that the commercial sector is concerned about is the maturity of short term commercial mortgage loans worth almost $1 trillion in the last months of 2010. As banks are hesitant to refinance, more commercial mortgages are expected to default.

To prevent bigger problems in the commercial property sector, the Federal Reserve extended its loan program designed to help investors acquire assets backed by consumer and commercial mortgages. The program, funded with up to $200 billion and which has already lent $29.6 billion originally was set to end this December.

The Real Estate Roundtable lauded the Fed’s move, saying the assistance would set more realistic asset prices and revive the commercial property sector.

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