U.S. commercial mortgages next bomb to hit, group says

Friday, May 1st, 2009

McClatchy Newspapers

WASHINGTON — Two years after fissures in the U.S. residential housing market gave way to a national collapse of home prices and sales, experts warn the next shoe to drop is the commercial real-estate market, bringing more woes to the battered economy.

Thousands of commercial mortgages valued at hundreds of billions of dollars are approaching a renewal date. By some estimates, two out of every three will no longer meet the original loan conditions and won’t be able to refinance. And with prices for commercial properties expected to plunge, a vicious cycle may unfold much as it has in the U.S. housing market.

“It’s the next wave to hit. It’s the next round of bad news,” said Scott Talbott, senior vice-president of government affairs for the Financial Services Roundtable, a trade group for big banks and other financial institutions who are collectively concerned about the coming problems.

A commercial-mortgage meltdown is likely to prolong the U.S. economic recovery. The falling prices in commercial real estate will lead to additional bank losses at a time when banks are sapped by home-mortgage defaults and soaring credit-card defaults. This could lead to future additional taxpayer assistance for the banks.

The reality is already on display. On April 16, the U.S.’s second-largest mall developer, General Growth Properties, filed for bankruptcy protection. The Chicago-based company owns more than 200 malls across the U.S., and was unable to renegotiate its debts as they came due.

Six days later, a 40-storey office tower on New York’s Avenue of the Americas was seized by its creditor, a Canadian-owned pension fund. The tower’s owner, Macklowe Properties, couldn’t meet loan terms.

“On the street, the rumour is it is coming and it’s going to come fast and furious. Some people are predicting September,” said Paul Waters, a New Yorkbased executive vice-president of brokerage operations in North America for NAI Global, a top-five commercial realestate brokerage with operations across the globe.

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