Commerical Real Estate Developers Seek Bailout Money

According to a report in The Wall Street Journal, commercial real estate developers have asked Treasury Secretary Henry M. Paulson Jr. to be included in a recently announced $200 billion loan program designed to help prop up lending for automobiles, credit cards and student loans by helping investors to buy securities backed by such loans.  According to research firm Foresight Analytics LLC, $530 billion will need to be refinanced in the next three years.  The reason is that most commercial mortgages expire anywhere from 3 to 10 years, even though the payments may be amortized over a period between a 15 and 30 years.  This allows banks to adjust to interest rate conditions by forcing the borrower to refinance periodically.  However, as the credit crisis has spread, there may not be enough lending available to refinance all of the commerical mortgages, resulting in defaults and foreclosures that would devastate commercial real estate prices.

 Paul Jackson at HousingWire.com noted that a report released on December 22, 2008, by real estate firm Reis, Inc., indicated that commercial mortgage defaults could triple in 2009, despite rental income falling only 5 percent, due to the dearth of financing.  Jackson also mentions that ratings firm Moody’s Investor Service last week warned that “$110 billion in US CRE-backed CDOs now face possible multi-notch downgrades due to deteriorating market conditions.”

Thus, commercial real estate, like credit cards, may be another problem area we should watch closely in 2009.  A deterioration in commercial real estate would further damage banks’ balance sheet and lead to a worsening of the credit crisis and, consequently, the macro economy.