February 3, 2010

Congress Worries About Commercial Real Estate

There is growing concern in Congress that the shaky $6.7 trillion commercial real estate market could implode, delivering a major blow to the economic recovery. A bipartisan group of 79 House members led by Representative Paul E. Kanjorski, Democrat of Pennsylvania, and Representative Ken Calvert, Republican of California, sent a letter to the Treasury Department and the Federal Reserve on Monday urging them to take a more active role in keeping the commercial real estate market from turning into a disaster.

“The growing bubble in the commercial real estate industry has the potential to infect our economy and slow a recovery,” Mr. Kanjorski said.

“In order to safeguard the businesses operating on Main Street and protect the millions of jobs depending on commercial real estate, the Treasury and the Federal Reserve now must take needed and urgent action to stave off a potentially devastating wave of commercial real estate foreclosures and bank losses,” Mr. Kanjorski said in a statement.

The congressmen are calling for the agencies to make clear public statements encouraging lenders to continue to make credit available for performing assets, even if the value of the property has taken a hit in its value. More than $1.4 trillion in commercial mortgages will come due by 2013, and as much as 65 percent of those deals will have trouble getting refinanced because of the drop in property values, according to Deutsche Bank.

By encouraging lenders to refinance the deals, the lawmakers are hoping that commercial real estate values will stabilize. But that assumes commercial real estate owners will even want to refinance their properties. In many cases, the debt payments exceed the rent roll, making it uneconomical to hold on to the property.

Take the $6.3 billion purchase in 2006 of residential apartment blocks Stuyvesant Town and Peter Cooper Village, above left, on the East River in Manhattan. The buyers, Tishman Speyer Properties and BlackRock Realty defaulted willingly on the property last week after the complex could not cover its costs. The property is now valued at less than $2 billion.

Source: The New York Times, February 1, 2010



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