The other shoe (no, make that a BOOT) is about to drop

Commercial property poses the next big bump in the road for Pollyanna’s that see a recovery just around the bend. With up to $1.4 trillion in commercial real-estate loans to be refinanced this year, the US commercial real estate market may follow the bloodbath seen in residential property.

Fitch Ratings reported that in 2010 about $475 billion of commercial real estate loans in the US will reach maturity. Attempting to roll-over these loans will create stiff competition for scarce financial funds.

Elizabeth Warren, head of the Congressional Oversight Panel, stated that almost 50 percent of planned rollovers involve a borrower owing more than the property is worth. And with many loans secured by properties written based on assumptions about rental growth that have not borne fruit, there is a growing probability of default.

This problem was brought into high relief during a visit to Los Angeles early last year when a friend took me on a tour of brand-new & fully-finished office towers. Problem was they were empty!

Fitch also reported that delinquencies on commercial real-estate loans supporting commercial mortgage-backed securities (CMBS) ended at 4.71% in 2009, a near 5-fold increase over 2008. CMBSs provide a crucial source of liquidity for the market and are formed by pooling mortgages, rating them and selling them on to investors.

The fat lady ain’t sang yet; and the recession ain’t over, until it is.

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About christopher

Content of "Natural Order" attempts to reflect the commitment of Universidad Francisco Marroquin to support the development of a society of free & responsible individuals. The principal commentator for this blog is Christopher Lingle.

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