Monday, November 16, 2009

Commercial property woes seen threatening US recovery

Slow recovery may hit exposed banks, leading to more credit tightening

Even as some sectors of the US economy see a return to growth, woes in commercial real estate are deepening, raising fears that the fragile recovery could falter.

Unlike the US home market, which has shown signs of rebounding, recovery is elusive in commercial real estate, a sector which includes apartments, offices and industrial and retail properties.

The Moody’s commercial property index fell 3 per cent last month, and remains 32.8 per cent down from a year earlier and 40.3 per cent lower than two years ago.

‘Although prices have declined steadily over the past year, the rate of decline has slowed in recent months after falling by about 8.0 per cent in both April and May,’ Moody’s said.

According to the Mortgage Bankers Association, loans for commercial and multi-family property activity fell 54 per cent in the third quarter from a year ago. Loan originations were off 12 per cent from the second quarter.

San Francisco Federal Reserve president Janet Yellen said that the prospects for the industry are ‘worrisome’. ‘Commercial property didn’t turn down until well after housing did,’ she said.

‘The sector’s problems appear to stem in large part from the effects of the recession and the credit crunch, rather than the type of building boom and lax underwriting standards that tripped up housing.’

The market for commercial mortgage-backed securities, Ms Yellen said, ‘remains deeply distressed and issuance is meagre despite support from the Fed’.

A survey by consultancy PricewaterhouseCoopers and the Urban Land Institute suggests that the market may continue to slide into next year.

The survey respondents predict that commercial real estate vacancies will continue to increase and rents will decrease across all property sectors before the market hits bottom next year.

It projects value declines of 40 per cent to 50 per cent off 2007 market peaks, setting up the potential for big bargains.

Some economists say that the slow pace of recovery in commercial real estate may dent the overall economy, by hitting banks exposed to the sector and leading to further credit tightening.

A survey by Foresight Analytics found that 53 per cent of commercial real estate mortgages due by 2014 – or some US$770 billion – were ‘underwater’, meaning the borrowers owe more than the value of the property.

Atlanta Fed president Dennis Lockhart said that he is concerned that ‘there could be an impact resulting from small banks’ impaired ability to support the small business sector – a sector I expect will be critically important to job creation’.

Mr Lockhart said that small banks hold a large portion of commercial real estate loans, which could mean a tightening of lending as defaults rise.

Kent Engelke, chief economic strategist at Capitol Market Securities, said that although the situation appears dire, banks have been through this kind of crisis before.

‘Based upon first-hand experience, I believe banks will work their borrowers (by) extending maturities . . . as long as the project is cash flowing waiting for asset values to recover,’ he said.

‘While I do believe commercial real estate is an issue I don’t think it will become the event many fear . . . Moreover once banks become more confident about the recovery, banks will then begin lending, hence adding further support to commercial real estate.’

Source: Business Times, 16 Nov 2009

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