There is another mortgage crisis coming in the commercial sector that may be more detrimental to the U.S economy than the current residential mortgage mess.
Los Angeles, CA, October 30, 2009 — There is another mortgage crisis coming in the commercial sector that may be more detrimental to the U.S economy than the current residential mortgage mess. In the lending heyday, banks lent borrowers money on the assumption that occupancy and rents of their office building, hotels, stores or other commercial property would keep rising. However, the opposite has happened. The result is that a growing number of properties are not generating enough cash flow to make principal and interest payments on their notes.
Today many of the commercial properties are not producing enough cash to afford the monthly payments on the debt. As a result, delinquencies on commercial mortgages have skyrocketed in 2009. According to credit rater Realpoint LLC, the commercial delinquency rate was 3.14% in July of 2009, which is more than six times the level a year earlier. High unemployment rates and office-vacancy rates are the primary factors contributing to the rise in commercial delinquencies. This problem is magnified by the inability of these property owners to refinance their commercial loans.
Until now, banks have been able to minimize commercial real estate losses by extending debt when it has matured. However, now the property values have fallen so far that borrowers will not be able to extend or replace their existing mortgages, even if the cash flows of these properties might be enough to make interest and principal payments on the debt.
Banks hold about $1.7 trillion in commercial mortgages and construction loans, and delinquencies on this debt already played a role in the increase in bank failures this year. Like residential loans, many commercial loans were bundled into commercial-mortgage-backed securities, packaged and sold on Wall Street as bonds. Similar mortgage-backed-securities created out of home loans were the catalyst that triggered global economic recession. There is another $700 billion of commercial-mortgage-backed securities that are being tested for the first time by a massive downturn. By the end of 2012, some $153 billion in loans that make up commercial-mortgage-backed securities are going to become due, and possibly $100 billion of that group will have difficulty getting refinanced, according to Deutsche Bank.
The commercial real estate market could yet be salvaged by an improving economy and government bailout programs coming out of Washington. Still it is unlikely commercial real estate will benefit much from an early stage of economic recovery. What landlords need is occupancy and rents to rise, and that means employers have to start hiring and consumers need to start buying. As of now, there are few signs that this is happening.
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Contact:
Charles Heppner
Commercial Loan Solutions, LLC
Los Angeles, CA 90036
Tel: 1.877.300.2901
Fax: 1.323.843.5330
[email protected]
http://www.commercialloansolutionsonline.com/
