The Trouble with Commercial Real Estate

What's ailing commercial real estate? Imagine if the fixed-rate loan on your house had just a seven or ten-year term and ended in a massive balloon payment. That's the story for most commercial properties.

Look around: if there's an office tower or apartment complex, chances are it was financed with a loan that ends after a few years with a balloon. That's part of the reason commercial real estate experts are worried about foreclosures -- and the depressing headlines, lender woes and bond chaos they could bring.

Balloon payments are a big problem. Most commercial borrowers planned to sell their properties or refinance their loans before the balloon payments came due - but credit is now tight, and buyers scarce.

Many of the lenders that used to make commercial real estate loans have gotten out of the business. And the few left demand that borrowers put a hefty chunk of their own money into properties. And, they won't lend even close to the full appraised value. It's an abrupt shift from the practices of the high-flying Wall Street lenders that used to dominate commercial real estate before the crash.

Now, appraised values are falling into a hole. As a result, even if owners can refinance, they will probably need to pour millions of their own dollars into their properties to keep the keys, even if the properties are fully-occupied with strong rents -- and not many are.

Of course, the owners can always sell at a loss. That's what just happened to the Skyway Commerce Center in Sacramento, Calif., according to a story in The 153,000-square-foot industrial park was appraised at $9.81 million in 2004, but Business Property Trust of Portland just sold it to Berkeley Capital Trust for $6.63 million. That just happens to be the outstanding balance of the loans on the property. The balloon payment was about to come due this January.

At least it didn't foreclose.
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