Grim reality still grips U.S. commercial real estate

NEW YORK (Reuters) - Executives do not expect the U.S. commercial real estate market to emerge from critical condition any time soon, according to a survey by The Real Estate Roundtable.

The store front that was once a Mattress Discounters store is empty and available for lease in the Back Bay neighborhood of Boston, Massachusetts November 28, 2008. REUTERS/Brian Snyder

Although the three indexes tracked by the “Sentiment Survey” have risen dramatically since the near-collapse of financial markets last year, they reflect the respondents’ collective sense of relief at having survived the worst of the turmoil, according to The Real Estate Roundtable.

The U.S. commercial real estate market has been in a downward spiral for more than two years. On the whole, U.S. commercial real estate values have fallen about 40 percent from their peaks in 2007. Borrowers face shortfalls in financings when loans come due, while other borrowers are struggling to meet even monthly payments.

The delinquency rate of U.S. commercial real estate loans that had been securitized into Commercial Mortgage-Backed Securities (CMBS) hit 4.8 percent in October, up from 4.36 the prior month and dwarfing the 0.77 rate a year earlier, according to Trepp, which tracks CMBS loans.

The Roundtable is a trade group that has been advocating for government policy changes to help jump-start the sector. It has urged policymakers to adopt its “Five-Point Liquidity Plan” which includes changes in tax rules that will allow more foreign investment and improving the Term Asset-Backed Lending Facility’s (TALF) ability to foster new issuance of commercial mortgage-backed securities (CMBS).

According to the Roundtable’s survey, U.S. property executives rate “current conditions” a 56 -- well below the ideal of 100.

An overall index of 100 would mean that respondents believe present conditions are “much better” than a year ago, and will be “much better” 12 months from now.

“The problems now are more clearly defined and there’s a grim sense of reality setting in, but that’s a long way from saying markets are stabilizing or that conditions are on the mend,” Roundtable President and Chief Executive Jeffrey DeBoer said in a statement.

Policymakers need to restore credit availability, address the equity shortfall resulting from falling commercial property losses, and foremost help create jobs, the Roundtable said.

About 77 percent of the more than 100 commercial real estate executives surveyed said property values are lower than a year ago.

Although that was down from 93 percent the previous quarter, it was far from optimistic. Seventy-one percent of the respondents said they expected values to remain “about the same” or to erode even further in the next 12 months.

As far as financing sources, 28 percent of those polled said credit availability is worse today than a year ago, compared with 71 percent who said so in the previous quarter.

The percentage that characterized equity availability as worse today than a year ago also dropped significantly -- to 17 percent from 55 percent in the prior quarter. However, 95 percent expect debt market conditions to be at least the same or better 12 months from now.

Reporting by Ilaina Jonas, editing by Matthew Lewis