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Philly Appraisal Blog

Commercial Real Estate: The Next Victim?
September 3rd, 2009 12:25 PM

As parts of the country begins to see a very small light at the end of the residential real estate tunnel, a larger potentially more devistating crisis may be looming on the horizon.

Now it appears that Commercial Real Estate is in danger of collapse.  The Appraisal Institute released the following updates the CRE sector.

Fed, Treasury Try to Preempt Potential CRE Downfall
Federal Reserve and Treasury Department efforts to keep the commercial real estate sector from suffering the same collapse as the residential sector are being undermined by rising foreclosure rates of commercial properties that were packaged and sold by Wall Street as bonds, according to The Wall Street Journal. The commercial mortgage-backed securities market, which was once seen as a stable investment for Wall Street, has been faltering in the wake of declining occupancy and rental rates, the newspaper said.

Further compounding the situation has been the difficulty property owners have faced when trying to refinance loans that have been bundled into CMBS. Of the $153 billion in CMBS set to come due by the end of 2012, Deutsche Bank reports that upwards of $100 billion of that will have a hard time getting refinanced.

All this indicates bad news for the government, which has been fiercely battling the global economic recession caused by the risky business practices of the residential mortgage-backed securities sector. The Fed and Treasury desperately want to stave off another blow to the nation’s fragile economy, but are limited in the steps they can take.

According to industry players, the Treasury is considering guidance that would allow servicers to start talking about ways to avoid defaults and foreclosures sooner , but is facing opposition from investors in CMBS bonds, who argue that the servicers are ultimately bound contractually to the bondholders. The complicated nature of CMBS makes it difficult for property developers and investors to know who the outside investors are who hold their debt.

As foreclosures mount in the CMBS sector, the government may react by enacting bailout programs. However, with the economy showing signs of getting back on track, politicians would far more likely see more jobs created and occupancy rates rise than another government handout that’s sure to rile many voters.

Extremely Distressed CRE Loans Rises to $11 Billion
For the first time since August 2008, the delinquent unpaid balance for commercial mortgage-backed securities dropped in July to $25.68 billion from the previous month’s figure of $28.65 billion, according to Realpoint’s latest monthly delinquency report. However, the decline was recorded after nearly $4.8 billion of General Growth-sponsored loans were updated to current status following a 30-day delinquent status filed in June. The $25.68 billion figure is now 12 times higher than its low point of $2.21 billion reached in March 2007 and represents a 511 percent increase from the same period a year ago.

While the overall delinquency volume dropped, the improvement was mainly in the 30-day delinquency category. The remaining four categories all registered increases in delinquencies. Foreclosures, REOs and 90-day delinquencies all recorded increases for the 20th consecutive month. The volume of loans in these categories increased $2.15 billion from June and is now up 377 percent from the same period a year ago.

As of July, the total unpaid balance for all CMBS loans reviewed by Realpoint totaled $819.2 billion. July’s resultant delinquency ratio dropped 3.5 percent from the previous month to 3.14 percent. The rate is now more than six times higher than its low point of 0.283 percent reached in June 2007. According to the delinquency report, loan workouts and liquidations totaled $152.4 in July, which encompassed 34 loans with an average loss severity of 31.3 percent. Overall, Realpoint still anticipates the delinquent unpaid CMBS balance to continue along its current trend, which is expected to approach $50 billion before the end of 2009.




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Posted by Michael Coyle on September 3rd, 2009 12:25 PMPost a Comment

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