Help for Foreclosure Properties in the Commercial Sector
New federal initiatives by President Obama’s administration to reduce the number of foreclosure properties in the commercial property sector are welcome, but many analysts think the initiatives are too late to save a lot of commercial mortgage-backed properties already facing foreclosures.
The Treasury Department has just launched its program aimed at helping investors buy toxic asset-backed securities, particularly commercial mortgage-backed securities. It plans to help pension funds, life insurance firms and private equity firms sell their distressed CMBS assets so that they can buy newer and better CMBS bonds. It also aims to help banks dispose off their toxic CMBS assets so that they can begin lending again.
Based on studies by Foresight Analysis, about $814 billion mortgages backed by commercial properties, such as shopping centers, office buildings, hotels, apartment buildings and warehouses, will mature in 2009 through 2011. About $250 billion CMBS will mature this year. If the borrowers are unable to increase their equity, CMBS lenders will be forced to turn these assets into foreclosure properties.
Starting in 2004 through 2007, numerous investors joined the commercial property boom, taking commercial mortgage loans amounting to more than 90 percent of the buying price. Lenders accepted unrealistic rental growth and occupancy growth assumptions.
When the subprime credit crisis began in the last months of 2007 and the housing market started to collapse, CMBS borrowers suddenly found themselves in unmanageable financial conditions, as commercial property sales slowed down and the credit sector dried up. What have been highlighted in the media are foreclosure properties in the residential sector, but a wave of foreclosure properties in the commercial sector is impending.
According to a report by Real Estate Economics, banks and other lending institutions had a default rate of 1.8 percent during the last quarter of 2008. Thomas Barrack, founder and chief executive of Colony Capital LLC, said the delinquency rate for CMBS loans could increase from 1.8 percent this month to 3.5 percent in December and to 6 percent in 2010. He said CMBS loans account for about one-fifth of all current commercial property loans in the country.
In response to the federal initiatives to head off foreclosure properties in the commercial property sector, the CMBS shares rallied for three days and helped the stock market recover. Fredric Leffel, senior executive of Savills PLC’s U.S. operations, expressed hope that the initiatives will help reduce the erosion of commercial real estate values.
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