TARP Panel Sees Further Commercial Real Estate Declines

Written By Brian Hicks

Posted February 12, 2010





As we have been pounding the table for some time now, the commercial real estate sector is absolutely teetering on the brink of even greater declines.

That’s now a position that has been taken up by the Congressional Oversight Panel in its latest report on the faltering industry.

In fact, just yesterday the TARP panel released a report that makes for some alarming reading as it relates to the prospect of a second dip in the overall economy.  You can read the full report here.

Of course, it is a very lengthy report (190 pages) so I have taken the time to point out some of the group’s more sobering observations and conclusions.

And while I have discussed all of these points in prior posts, it is nonetheless important to keep them in mind as we look out over the market horizon.

From the report:

  • ” Over the next few years, a wave of commercial real estate loan failures could threaten America‘s already-weakened financial system. The Congressional Oversight Panel is deeply concerned that commercial loan losses could jeopardize the stability of many banks, particularly the nation‘s mid-size and smaller banks, and that as the damage spreads beyond individual banks that it will contribute to prolonged weakness throughout the economy.”
  •  “Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will reach the end of their terms. Nearly half are at present -underwater – that is, the borrower owes more than the underlying property is currently worth.”
  • “Commercial property values have fallen more than 40 percent since the beginning of 2007. Increased vacancy rates, which now range from eight percent for multifamily housing to 18 percent for office buildings, and falling rents, which have declined 40 percent for office space and 33 percent for retail space, have exerted a powerful downward pressure on the value of commercial properties.”
  • “The largest commercial real estate loan losses are projected for 2011 and beyond; losses at banks alone could range as high as $200-$300 billion. The stress tests conducted last year for 19 major financial institutions examined their capital reserves only through the end of 2010. Even more significantly, small and mid-sized banks were never subjected to any exercise comparable to the stress tests, despite the fact that small and mid-sized banks are proportionately even more exposed than their larger counterparts to commercial real estate loan losses.”  (Emphasis mine)
  • “A significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American. Empty office complexes, hotels, and retail stores could lead directly to lost jobs. Foreclosures on apartment complexes could push families out of their residences, even if they had never missed a rent payment. Banks that suffer, or are afraid of suffering, commercial mortgage losses could grow even more reluctant to lend, which could in turn further reduce access to credit for more businesses and families and accelerate a negative economic cycle.”
  • “It is difficult to predict either the number of foreclosures to come or who will be most immediately affected. In the worst case scenario, hundreds more community and mid-sized banks could face insolvency. Because these banks play a critical role in financing the small businesses that could help the American economy create new jobs, their widespread failure could disrupt local communities, undermine the economic recovery, and extend an already painful recession.”
  • “The health of the commercial real estate market depends on the health of the overall economy. Consequently, the market fundamentals will likely stay weak for the foreseeable future. This means that even soundly financed projects will encounter difficulties. Those projects that were not soundly underwritten will likely encounter far greater difficulty as aggressive rental growth or cash flow projections fail to materialize, property values drop, and LTV ratios rise on already excessively leveraged properties.”
  • “Although peak commercial real estate debt outstanding was only one-third that of residential mortgage debt at its peak in Q1 2008, the size of the commercial real estate market means that its disruption could also have ripple effects throughout the broader economy, prolonging the financial crisis.”

Those unfortunately are the cold hard facts about CRE….

Related Articles:

2010 Commercial Real Estate Forecast

Commercial Real Estate a Big Problem Mack Says 

 2010 Stock Market Outlook

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