Fall in values makes it tough for owners to refinance almost US$165b of mortgages
(WASHINGTON) The collapse in commercial real estate is preventing Federal Reserve chairman Ben Bernanke from declaring that the economy and financial markets are healed.
Property values have fallen 35 per cent since October 2007, according to Moody's Investors Service. That's making it tough for owners to refinance almost US$165 billion of mortgages for skyscrapers, shopping malls and hotels this year, pressuring companies such as Maguire Properties Inc, the largest office landlord in downtown Los Angeles, to put buildings up for sale.
The industry is likely to be high on the agenda when Mr Bernanke and his colleagues sit down in Washington today for the Federal Open Market Committee meeting on monetary policy.
Lawmakers including Barney Frank and Carolyn Maloney are pushing the central bank to extend an aid programme designed to restore the flow of credit.
If non-residential real estate remains in the doldrums, the Fed may be forced to leave emergency-lending programmes in place and keep its benchmark interest rate close to zero for longer than some investors expect, given positive signs elsewhere in the economy.
Commercial property is 'certainly going to be a significant drag' on growth, said Dean Maki, a former Fed researcher who is now chief US economist in New York at Barclays Capital Inc, the investment-banking division of Barclays plc.
'The bigger risk from it would be if it causes unexpected losses to financial firms that lead to another financial crisis.'
The Fed is 'paying very close attention', Mr Bernanke told the Senate Banking Committee last month in the semi-annual monetary-policy testimony. 'As the recession's gotten worse in the last six months or so, we're seeing increased vacancy, declining rents, falling prices, and so, more pressure on commercial real estate.'
The pressure may be easing in other areas of the economy. Gross domestic product shrank at a better-than-forecast one per cent annual pace in the second quarter after a 6.4 per cent drop the prior three months, and residential housing starts rose unexpectedly by 3.6 per cent in June as construction of single-family dwellings jumped by the most since 2004, according to Commerce Department data.
Employers cut fewer workers than anticipated last month as the jobless rate fell to 9.4 per cent from 9.5 per cent in June - the first decline since April 2008, based on Labor Department figures.
Amid such glimmers of improvement, commercial real estate is a 'particular danger zone', Janet Yellen, president of the Federal Reserve Bank of San Francisco, said in a speech in Idaho last month.
The market may be 'under stress for some considerable period of time', William Dudley, chief of the New York Fed bank, said the following day in New York.
Non-residential construction may decline as much as 9 per cent this year and another 5 per cent in 2010, predicts Kenneth Simonson, chief economist at Associated General Contractors of America, an Arlington, Virginia. In the second quarter, it accounted for 3.6 per cent, or US$509 billion, of US GDP on an annual basis, down from 4.3 per cent in the final three months of 2008.
A dozen lawmakers questioned Mr Bernanke on the topic during his Congressional testimony last month. Some asked about extending the Term Asset- Backed Securities Loan Facility, the emergency programme that the Fed began in March to restart the market for securities backed by car, credit-card and education loans.
The central bank expanded the facility in June to cover as much as US$100 billion in loans to support commercial mortgage-backed securities.
Fed policy makers will prolong the programme if they judge that financial markets are still 'some distance from normal operation', Mr Bernanke said in his testimony. 'We will certainly be monitoring the situation.'
The Fed likely will change the end date - just not right away, said former central-bank governor Lyle Gramley. 'They're probably going to want to wait a while to see how markets develop,' said Mr Gramley, 82, now senior economic adviser with Soleil Securities Corp, a New York investment-research firm.
A six-month continuance is more likely than the one year that industry officials want, said former Fed governor Laurence Meyer, vice-chairman with consultant Macroeconomic Advisers LLC of St Louis. -- Bloomberg
Source: Business Times, 11 Aug 2009
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