Commercial Real Estate Time Bomb is Ticking

With the most quoted statement of the day, serious attention was suddenly thrust on the commercial real estate market. It came from Representative Carolyn Maloney, democrat from New York and Chairman of the Joint Economic Committee: "The commercial real estate time bomb is ticking."

This was in reference to some shocking statistics they came up with that indicate the commercial market may end up crashing within months, like the real estate market did, and might take until 2012 or 2014 to begin to recover.

The numbers are stunning. More than 5,300 businesses have bailed on commercial real estate loans as of June of this year, more than twice the number as of last year at the same time. Around 0 billion in commercial mortgages need to be refinanced before the end of 2010, and banks aren't giving up the money. Losses on commercial mortgage-backed securities are expected to be between 9 and 12%of the market, or as much as billion, and another 0 billion in losses are expected from construction loans made by banks.

Commercial real estate debt is sitting around .5 trillion (yes, the dreaded "T" word). And commercial property values have dropped anywhere from 40 to 55% across the country.

In April, the second largest owner of shopping malls in the nation filed for bankruptcy protection, and other mall corporations around the country are finding banks playing hardball by either ending loans already in existence or not loaning out anything new. In New York, one corporation is actually suing Citigroup, trying to get the courts to force a bank to lend them money.

Why is this all such a big deal? At stake, states James Helsel of the National Association of Realtors, are 9 million jobs that these companies provide, and with unemployment already at 9.5% across the country, no one needs another 9 million people looking for jobs that won't exist without a place to go to work those jobs.

The Federal government is trying to do its part. First, they launched a program trying to get banks to lend more money to consumers and small businesses. The program, known as the Term-Asset-Backed Securities Loan Facility, was opened to commercial real estate loans last month. The government is expected to make the program available for existing commercial mortgage securities, and announced back in June that they would accept as collateral the new issuance of commercial mortgage-backed securities.

Jon Greenlee, associate director of the Federal Reserve's division of banking supervision, told the Joint Economic Committee panel that the central bank has stepped up training of its bank examiners so they are ready to deal with rising losses from the commercial real estate industry.

The worries are that, one, what already exists or is coming might not be enough and two, that these programs all expire at the end of the year. However, since many programs are actually extensions of some programs launched last year, and knowing that Congress is working hard to figure out ways to stem the slide of our economy, it's expected that most of these programs will continue in some form, hoping to affect a turnaround in a much quicker time period.