Developers want some, Too!

Rocket River · Dec 22, 2008

http://www.chron.com/disp/story.mpl/business/6177048.html

Developers ask for bailout as massive debt looms
By LINGLING WEI AND JON HILSENRATH The Wall Street Journal
Dec. 22, 2008, 6:50AM
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Print Email Del.icio.usDiggTechnoratiYahoo! BuzzWith a record amount of commercial real-estate debt coming due, some of the country's biggest property developers have become the latest to go hat-in-hand to the government for assistance.

They're warning policymakers that thousands of office complexes, hotels, shopping centers and other commercial buildings are headed into defaults, foreclosures and bankruptcies. The reason: according to research firm Foresight Analytics LCC, $530 billion of commercial mortgages will be coming due for refinancing in the next three years — with about $160 billion maturing in the next year. Credit, meanwhile, is practically nonexistent and cash flows from commercial property are siphoning off.

Unlike home loans, which borrowers repay after a set period of time, commercial mortgages usually are underwritten for five, seven or 10 years with big payments due at the end. At that point, they typically need to be refinanced. A borrower's inability to refinance could force it to give up the property to the lender.

A recent letter sent to Treasury Secretary Henry Paulson, and signed by a dozen real-estate trade groups, painted a bleak scenario: "Right now, we believe there is insufficient systemic capacity to refinance expiring, performing commercial real-estate loans," said the letter. "For many borrowers, 1/8 credit 3/8 simply is not available," the letter noted.

To head off some of the impending pain, the industry is asking to be included in a new $200 billion loan program initially created by the government to salvage the market for car loans, student loans and credit-card debt. This money is intended to go directly to help investors finance purchases of securities backed by these assets. If commercial real estate is included, banks might have an incentive to make more loans to developers since they'd be able to repackage and sell them more easily to investors with the assurance of government backing.

As part of their lobbying efforts, some industry representatives have asked lawmakers to explore the idea of setting up a separate program aimed at boosting lending to commercial real estate only.

"We've been urging Washington to put this as one of the top priorities in dealing with the economy," says Steven Spinola, president of the Real Estate Board of New York, underscoring the need for the government to help spur commercial property lending either directly or indirectly.

The real-estate executives are warning that the approaching surge in commercial mortgages coming due poses another major threat to the global financial system, which already is on life support. With rent prices falling and vacancies rising due to the weakening economy, delinquencies on commercial mortgages already have begun to rise sharply.

Up until now, delinquencies on commercial real-estate loans have stayed below historical levels thanks in part to the limited amount of speculative construction in recent years. But now they're rising at a time when a huge volume of loans are coming due and some of the few institutions that were still making loans are retreating from the market.

"The credit crisis has got so bad that refinancing of even good loans may be drying up," says Richard Parkus, head of commercial-mortgage-backed securities research at Deutsche Bank.

Commercial real-estate owners, of course, are just the latest to get in line in Washington, D.C., for the billions of bailout dollars that the government has begun to hand out. Other businesses that have received or are campaigning for some form of aid include banks, credit-card issuers, car companies and even farm equipment maker Deere & Co.

Real-estate owners are pressing the government to take preemptive action before thousands of properties begin to fail. Among those who have been active in the lobbying effort: William Rudin, whose family is a large Manhattan office-building owner, Stephen Ross, chief executive of The Related Cos., a major U.S. developer, and Steven Roth, chief executive of office and retail landlord Vornado Realty Trust.

In recent weeks, industry representatives have met with officials in the Treasury Department, Senate Majority Leader Harry Reid, senior lieutenants of Federal Deposit Insurance Corp. Chairwoman Sheila Bair, members of President-elect Barack Obama's transition team, and Sen. Charles Schumer (D., N.Y.).

One potential challenge for the industry: Though some Treasury and Fed officials are worried about the impact of its troubles on credit markets, other sectors — such as the residential mortgage and auto industries — are more pressing concerns.

Treasury and Fed officials have said they would consider including commercial real-estate in the new $200 billion loan initiative. But such a step won't happen soon. The program is not likely to be operational until February. Even then, expanding it to include the immense commercial real-estate market would likely require additional financial support from the Treasury.

For now, the Treasury has agreed to backstop the Federal Reserve on as much as $20 billion of losses on the program. That means Treasury will take the first $20 billion of any losses using funds approved by Congress for the $700 billion Troubled Asset Relief Program.

There's widespread agreement that a record volume of commercial real-estate loans made during the boom years are starting to come due. According to Foresight Analytics, the $530 billion of commercial mortgages that will be maturing between now and 2011 includes loans held by banks, thrifts and insurance companies as well as loans packaged and sold as commercial-mortgage-backed securities — or CMBS.

At the heart of the financing scarcity is the virtual shutdown of the market for CMBS, where Wall Street firms sliced and diced commercial mortgages into bonds. During the recent real-estate boom that took off in 2005 and lasted through early 2007, that market fueled the lending to real estate because banks could sell easily the loans they made. But the credit crisis that started in the summer of 2007 has put the securitization market on hold, which, in turn, has caused lenders of all stripes to become increasingly reluctant to make new loans.

While commercial real-estate developers restrained themselves during the boom years when it came to speculative development, property investors bid up the prices of office buildings, malls and other projects to record levels assuming rents and occupancies would keep rising. With cash flows now falling, a growing number of developers are having a tough time repaying their debt. In cases where owners need to sell buildings to satisfy loans, the current environment makes that difficult. A revitalized lending climate is necessary, they say, to keep them afloat.

What's not clear is how soon the crunch will come. The Real Estate Roundtable, a major industry trade group, predicts that more than $400 billion of commercial mortgages will come due through the end of 2009. Foresight Analytics estimates that $160 billion of commercial mortgages will mature next year.

Jeff DeBoer, president and chief executive officer of the Roundtable, says the group came up with its estimate by looking at the $3.4 trillion of commercial real-estate loans outstanding. It's not unusual for roughly 10 percent of the industry's debt to roll over every year, he says, referring to refinancings.

This year, some $141 billion worth of commercial real-estate debt owed by property owners and developers to lenders came due, according to Foresight Analytics. Most of that was refinanced or extended by existing lenders. The lion's share of those loans was made between five and 10 years ago. Despite the recent decline in property values, the underlying buildings were still worth well more than their mortgages and were generating sufficient cash to pay debt service.

But the delinquency rate on payments to mortgage lenders is rising, particularly for properties that were financed at the top of the market. Delinquencies on commercial mortgages jumped to 0.96 percent in November, up from 0.62 percent in September.

Some analysts predict the delinquency rate will leap to 2 percent by the end of next year. During the real-estate collapse of the early 1990s, the worst-performing commercial mortgages — those that were made in 1986 — sustained losses of about 10 percent.
Click to expand...

Everyone wants a peice!

Question - why not give it to the people
If people get the money
they spend it . . . ON THEIR CARS .. ON THEIR HOUSES
and put it in FINANCIAL INSTITUTIONS

Rocket River

rocketsjudoka · Dec 22, 2008

Not surprising as commercial real estate was going crazy a few years ago and has really tanked recently. Unfortunately for my business this is really starting to hit the architecture market hard and several firms that I have worked with are laying people off.

AGBee · Dec 22, 2008

Time to load up on SRS.

Supermac34 · Dec 23, 2008

The only problem I have with this article is it is talking about loans coming due in 1-3 years. A LOT can happen to an economy in 1-3 years (heck, we just saw what could happen in 4 months!). It is entirely possible that by the time a lot of this money comes due, the economy will have turned around and credit will be rolling again.

fmullegun · Dec 23, 2008

Rocket River said:

http://www.chron.com/disp/story.mpl/business/6177048.html

Everyone wants a peice!

Question - why not give it to the people
If people get the money
they spend it . . . ON THEIR CARS .. ON THEIR HOUSES
and put it in FINANCIAL INSTITUTIONS

Rocket River
Click to expand...

yeah!

plus i need to get my hair did.

Rocket River · Dec 24, 2008

fmullegun said:

yeah!

plus i need to get my hair did.
Click to expand...

Hair Places stopped paying taxes???
People working at those places stopped contributing to the economy??

If you trying to intimate it is frivolous spended welll
700 Billion just went out to 'business men' who evidently were spending like drunken sailors. .. and we gave them more money

so
tell . . what are you trying to say?

Rocket River
Alot of 'fiscal conservatives' and staunch anti-welfare folx seem to be in Washington with their hats in hand looking for a HAND OUT!

emjohn · Dec 24, 2008

Of all the fields asking for a bailout, I'm not especially angry/annoyed at these guys. Their pain is especially real, will have a major effect on the economy, and more uniquely, is not a problem of their own making. Their problem is a direct result of the collapse of the credit institution.

Still, who DIDN'T see this coming when TARP was being rushed through? Kudos to our elected officials for landing us in this horrific mess of a rolling snow ball. How long until the airlines are knocking on the doors?

...and meanwhile, the Yankees add another $180M to their payroll.

Evan

weslinder · Dec 24, 2008

emjohn said:

Of all the fields asking for a bailout, I'm not especially angry/annoyed at these guys. Their pain is especially real, will have a major effect on the economy, and more uniquely, is not a problem of their own making. Their problem is a direct result of the collapse of the credit institution.

Still, who DIDN'T see this coming when TARP was being rushed through? Kudos to our elected officials for landing us in this horrific mess of a rolling snow ball. How long until the airlines are knocking on the doors?

...and meanwhile, the Yankees add another $180M to their payroll.

Evan
Click to expand...

How is it not their making? They're the ones who overbuilt.

pgabriel · Dec 24, 2008

Just to clarify, a commercial real estate mortgage usually has a term of five years, but is usually amortized over 15 years. so in a normal credit climate, the loan is just refinanced, extended or however you want to look at it. but technically it is due after five years. now with the credit crunch, these guys might have to pay the balance of the loans when they come due, there is no financing capacity.

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