August 31, 2009: Commercial Real Estate Loans and CMBS
Today, the Wall Street Journal published an article asking if commercial real estate will be the next "mortgage crisis." This article focuses on the exposure of the $700 billion Commercial Mortgage-Backed Securities (CMBS) market rather than the $1.7 trillion in commercial mortgages held by the banking industry. The total value of commercial real estate is estimated to be $6.7 trillion.
The article points out that borrowers face two different types of problems. First, occupancies and rents are down as a result of the recession. Second, and potentially more problematic, borrowers are finding that they are unable to refinance maturing loans, even when their properties are producing sufficient cash flows to service those loans. This is a result of the continuing fallout from the meltdown of the credit markets that began as a result of the Fed's bungled handling of Lehman Brothers and AIG back in September of 2008. More than $150 billion in CMBS is maturing and in need of refinancing during the next three years.
CMBS borrowers also are facing many of the same problems as homeowners whose residential mortgages were securitized. They have difficulty in even identifying who owns their mortgages, and they find that the servicers of these securities are woefully understaffed and unprepared for dealing with the growing volume of delinquencies, which have increased by 600 percent during the past year to more than 3 percent. If the rest of the $6.7 trillion commercial real estate industry is in similar shape, this translates into more than $200 billion in troubled commercial real estate properties.
