Commercial Real Estate Difficulties To Come

People have been warning about a commercial real estate crisis - and I keep looking for it - but there is a bit of 'Waiting for Godot' as the clock ticks on. Just when I stop looking for it, that'll be when it happens:

The new round of financial pain, which some had anticipated but hoped to avoid, now seems all but certain. "There's been an enormous bubble in commercial real estate, and it has to come down," said Elizabeth Warren, chairman of the Congressional Oversight Panel, the watchdog created by Congress to monitor the financial bailout. "There will be significant bankruptcies among developers and significant failures among community banks."

Unlike the largest banks, such as Citigroup and Wachovia, that got into so much trouble early on, the community banks in general fared better in the residential mortgage crisis. But their turn is coming: Not only did community banks issue a higher proportion of commercial loans, but they also have held on to them rather than sell them to other investors.

...In Washington, the number of troubled properties has multiplied at a phenomenal rate, with the value growing from only $13 million in 2007 to $40 billion now, according to CoStar Group, a Bethesda real estate research company. The region trails only South Florida and metropolitan New York in the per capita value of commercial real estate assets in foreclosure, default or delinquency, according to the research group Real Capital Analytics.

...Whether the commercial real estate bubble bursts in a catastrophic event or subsides slowly and less dangerously will be determined during the next year. An immediate crisis was postponed when domestic and foreign investors began snatching up troubled properties at bargain prices. And banks more and more are renegotiating loans, extending the terms by a year or two in the hope that conditions will improve rather than calling in mortgages that cannot be paid.

...Nationwide, at least $1.4 trillion in commercial real estate debt is expected to roll over during the next three years. Warren said that half of commercial real estate mortgages will be underwater by the beginning of 2011. A fifth of residential mortgages are underwater now, she said.

Unlike residential mortgages, which often can be paid over 30 years, commercial real estate mortgages typically must be paid off or refinanced within five years. Commercial properties mortgaged in 2005, 2006 and 2007, at the height of the boom, are reaching their maturity date. "Do the math on this," Warren said. "This is a significant problem."