San Diego, CA (PRWEB) August 19, 2009
RealEstateInvestor.com (REI) is reacting to last week's news that the outlook for commercial real estate looks increasingly grim, even though the housing market is beginning to show signs of recovery. This imbalance could be troubling for the already fragile U.S. banking sector.
Businesses are being forced to cut back on rental space which results in declining revenue for many landlords. And the rate at which property owners are defaulting on loans is rising at an unprecedented pace. A number of banks are left with shopping malls, hotels and office buildings they have repossessed, but cannot sell. And many banks have had to close due to sour commercial loans.
"It comes down to the fact that defaults are blowing up," says REI CEO Colin Egbert. "It's really a rough situation. I'd venture to say it's going to be as bad or worse than it was in the early 1990s."
There is about $3.5 trillion worth of commercial real estate loans held by banks, tied up in commercial mortgage-backed securities or held by other institutions.
More than $2 trillion in commercial mortgages are expected to become due between now and 2013. But due to the tightened underwriting standards and plummeting real estate values, many property owners will find challenges qualifying for refinancing.
In some cases, landlords facing growing debt are walking away from some of their properties if they cannot find a buyer.
This week, Maguire Properties Inc. said it would stop making payments on more than $1 billion in loans for seven office buildings in Southern California. "Seeing these types of defaults in my own back yard reminds me that investors of any size still need to use caution in this market," says Egbert.
Commercial real estate depends largely on free-flowing credit markets and steady spending by businesses and consumers -- neither of which economists expect will happen anytime soon, which may lead to more commercial loan defaults before long.