| NEW YORK
NEW YORK The new federal programs to aid the U.S. financial markets will likely not fend off the impending wave of foreclosures on U.S. commercial real estate loans, experts said.
U.S. Treasury Department officials unveiled this week more specifics of a program that will enable the federal government to help private buyers purchase toxic loans and asset-backed securities, including commercial mortgage-backed securities (CMBS).
While there is much public debate about whether it will get the banking industry back on its feet, many real estate experts said that it won't prevent an approaching wave of defaults of current loans in the U.S. commercial real estate sector
"This isn't designed to head off foreclosures," said Thomas Barrack Jr, head of real estate private equity firm Colony Capital, which has $36 billion of assets under management. "This is designed to start the banks lending."
The U.S. commercial real estate boom that started around 2004 and peaked in 2007 was fueled by cheap debt. Banks and other lenders were often willing to lend up to 90 percent or more of the purchase price. The loans often assumed optimistic rent growth and rising occupancies in the future.
Borrowers and lenders assumed that the loans, often interest-only, would be repaid by property sales or by new loans that would more than cover the principal due.
But the market began to collapse in the second half of 2007, when the credit markets froze. Now borrowers are finding themselves squeezed as older loans come due and there is little lending to support sales or refinancing.
About $814 billion in commercial mortgages -- for apartment houses, office buildings, shopping centers, warehouses and hotels -- are expected to mature this year through 2011, with $250 billion due this year, according to Foresight Analysis.
That means borrowers will have to raise more equity, which is expensive, or lenders will have to foreclose or extend loans, hoping values will rise again.
"The myth has been that commercial is far more solid than residential," said Robert White Jr, president of Real Capital Analytics. "We were all patting ourselves on the back, that we weren't overbuilding."
AS BAD AS THE HOUSING BUST
Those cheery days seem long past.
U.S. commercial real estate prices are falling at a similar rate to residential, down about 17 percent year over year, according to Real Capital Analytics.
Sales volume for commercial real estate was down 80 percent in February because of the inability to get a loan and the wide gap between the prices buyers and sellers want.
U.S. commercial real estate prices may fall 35 to 45 percent from their peak, exceeding the declines of the painful downturn of the early 1990s, according to Richard Parkus, head of CMBS research for Deutsche Bank. Rent declines and vacancy rates may approach those of the early 1990s.
The aim of the U.S. Treasury plan is to get banks to start lending again by clearing away bad commercial real state loans. When pension funds, private equity firms and life insurance companies are able to sell off their devalued CMBS bonds, they will be willing to buy newer, better-quality loans.
The plan's specifics sent the CMBS on a three-day rally, and helped boost the overall stock market.
"By clearing out some of the inventories, the theory is they will have more capacity to make new loans ... probably," said Fredric Leffel, senior vice president of the U.S. arm of real estate advisory firm Savills Plc.
But by the time the banks start lending again, they are likely to be more conservative. The loans will likely cover less of the value of the property to be acquired and that value is likely to be lower, leaving much of the expiring principal uncovered.
"The problem with the foreclosures is that anyone with any real estate today may own it at less than 50 percent of the value that it was two years ago," Barrack said. "That problem isn't going to go away."
The delinquency rate among CMBS loans, which hit 1.8 percent in March, could rise to 3.5 percent by the end of the year, and 6 percent next year. CMBS loans comprise about 20 percent of the outstanding U.S. commercial real estate loans.
Among banks and other institutional lenders, the default rate was 1.8 percent in the fourth quarter of 2008, according to Real Estate Economics. The research firm expects that to jump to 3.9 percent by the end of the year, 4.7 percent by the end of 2010, and peak at 4.8 percent in 2011.
In addition to the refinancing problem, U.S. commercial real estate owners are wrestling with the recession and rising vacancy rates, lower demand and decreasing rents that have accompanied it. But those concerns, however great, are dwarfed by the shortfall funding available to refinance past loans.
"While obviously fundamentals have deteriorated, the much bigger problem is the maturity problem," Leffel said.
So what will the federal program do for the commercial real estate industry?
"It will lessen the erosion of values," Leffel said. "It will smooth things out, particularly if you can get financing back into the market, and to that extent it does help the industry."
(Reporting by Ilaina Jonas; editing by Patrick Fitzgibbons and Matthew Lewis)