Watchdogs Warn of New Wave of CRE Defaults
The message from the Congressional Oversight Panel, which is charged with reviewing the government's $700 billion bailout program, is not exactly surprising: HousingWatch and other sites have been reporting on the plight of the commercial real estate sector for some time now. But what is disconcerting to some is the strength of the language used to describe the problem and the bleak prognosis: "A significant wave of commercial mortgage defaults" could create a downward spiral that "would trigger economic damage that could touch the lives of nearly every American," warns the panel.
"Over the next few years, a wave of commercial real estate loan failures could threaten America's already-weakened financial system," says the panel's report. "The Congressional Oversight Panel is deeply concerned that commercial loan losses could jeopardize the stability of many banks, particularly the nation's mid-size and smaller banks, and that as the damage spreads beyond individual banks that it will contribute to prolonged weakness throughout the economy."
Pretty heavy stuff.
In what surely is award-winning understatement, the chairwoman of the panel, Elizabeth Warren, tells CNBC, "Well, it's bad."
The panel, says the New York Times, reports that commercial real estate failures next year alone could cause banks to lose as much as $300 billion.
Despite this, the chief executive of the Independent Community Bankers Association, Camden Fine, tells the paper, "We believe that the Congressional Oversight Panel overstates the threat commercial real estate loans present to the vast majority of community banks nationwide."
But USAToday points out that, because of the current economic conditions in the country, commercial vacancy rates are higher and rents generally lower than last year, "forcing developers to default on loans."
Worse yet, by 2014, some $1.4 trillion in commercial real estate loans will reach term and need to be refinanced. Already, half of those loans are underwater (meanign they are worth less than their mortgage loans), says the panel.
Doesn't sound like the panel is overstating its case to me!
Charles Feldman is a journalist, media consultant and co-author of the book, "No Time to Think: The Menace of Media Speed and the 24-hour News Cycle." He has written about real estate related issues for several years.