Equity in US commercial property may evaporate-report
NEW YORK, July 29 |
NEW YORK, July 29 (Reuters) - The equity in $1.3 trillion worth of U.S commercial real estate acquired or refinanced in 2006 through early 2008 is at risk of being completely wiped out by price collapses, according to a report by Real Estate Capital Analytics.
About $2.2 trillion of properties acquired or refinanced after the 2004 start of the commercial real estate bubble have lost value, according to the report, released on Wednesday by the real estate data company. As most those deals were financed with 70 percent to 80 percent or more of debt, the lower value will directly eat away at the equity.
"By the end of 2010 you'll have begun to see terrible, terrible capital structure disintegration," said Philip Blumberg, chairman and chief executive of Blumberg Capital Partners. "The first thing to go is the equity."
About $165 billion of commercial mortgages this year will mature and need to be refinanced or sold. Some $11.8 billion matured in June, according to mortgage data analysis provider First American CoreLogic.
The number of distressed properties in the top 10 markets topped 5,000 in March, the most recent recording period, for the first time since CoreLogic began keeping record in January 2003.
"The maturities haven't really gotten into full play yet," Blumberg said. "We are seeing the early edge of the hurricane of debt in real estate."
Prices for warehouses, office buildings, shopping centers and apartment buildings are down about 37 percent from the peak in 2007, according to Moody's REAL Index. The cost and availability of new loans has dried up, and lenders that will grant loans will do so only at 50 percent to 60 percent of value. Prices have plunged at an increasing rate, dropping 18 percent in the first five months of 2009, Real Capital Analytics said.
Meanwhile, the value has declined even more as rent and occupancy rates have tumbled.
Properties bought or refinanced in 2006 through 2008 have seen a 25 percent decline in value, Real Capital Analytics said.
The value of distressed properties has more than doubled so far in 2009. Some $93 billion of office, industrial, retail, and apartment properties in the United States have fallen into default, foreclosure or bankruptcy this cycle, Real Capital Analytics said.
Struggling hotels and other commercial property types add at least another $31 billion to the total.
Less than 10 percent of the distressed situations that have emerged have been resolved. Lenders have been slow to foreclose and have chosen to instead extend the loans.
Loans originated at the peak of the market in 2007 are seeing the highest levels of default. (Editing by Steve Orlofsky)
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