Distress soon could hit U.S. commercial property

If the news hasn't been bad enough, here' some more, this time from Reuters.

By Ilaina Jonas - Analysis

NEW YORK (Reuters) - U.S. commercial real estate prices are likely to tumble over the next 12 to 18 months as more borrowers default on their loans and regulators crack down on banks, pushing even more properties onto the market.

Since the market's peak in 2007, the availability of debt -- the lifeblood of commercial real estate -- has dried up and choked off sales. Borrowers have resisted selling because of falling prices. Banks have not sold off their troubled loans, fearing a massive write-down of all commercial real estate loans. But the clock looks to be running down.

"We're going to see a whole lot more trouble going forward," Peter Steier, vice president of Inland Mortgage Capital Corp said.

Steier was speaking at the Distressed Commercial Real Estate Summit East last week, where about 200 investors, lenders and buyers gathered in hopes of finding ways to capitalize on the commercial real estate corpses that are likely to come as foreclosures, sick banks and distressed loans spread.

From their peak last year, office prices in the second quarter were down 11.2 percent; retail prices fell 4 percent; and warehouse and distribution center prices were off 6.7 percent, according to real estate research firm Reis Inc. Apartment prices were down 13.8 percent from their peak in late 2005.

Sales are expected to fall 66 percent this year from $467 billion to an estimated $159 billion because debt, especially securitized debt in the form of commercial mortgage-backed securities (CMBS), is either unavailable or prices are too high and terms too strict for borrowers, Reis said.

So far, many of the distressed commercial properties and loans have appeared in Arizona, Las Vegas and Florida, as well as in Atlanta -- and already-troubled Louisiana, Michigan and Ohio.

"One of our biggest problem areas is pretty much the state of Ohio," said Kevin Donahue, senior vice president Midland Loan Services Inc, a CMBS special servicer which steps in when a loan is showing imminent signs of trouble. "If we keep going, by the second quarter of 2009, I think the entire state of Ohio will become a subsidiary of Midland."

Many of the defaults and foreclosures have been directly related to the collapse of the housing market. Undeveloped land sells for about 10 cents on the dollar, and finished condominiums sell for up to 90 cents on the dollar, said Michael Lessor, managing director of loan sales advisor Eastdil Securities.

But many expect loans on better-quality buildings, especially shopping centers, to start running into trouble, as borrowers find they cannot refinance their maturing loans and are forced to sell or else default.

Many problems loans were issued, pooled and securitized in 2006 and the first part of 2007. The loans assumed rents and commercial real estate prices would continue to rise. Many of them were heavily leveraged 3- or 5-year interest-only, floating rate loans coming due in 2009-2010.

"Any loan made in the last couple of years that was based on an improving story is having issues," said David Iannarone, managing director with loans servicer CWCapital Asset Management LLC. "The story has not improved."

Still, many borrowers remain reluctant to sell, hoping the market will improve before their loans mature. But they may be forced to sell at lower prices or face default on balloon payments.

Lehman Brothers said about $167 billion of fixed-rate CMBS loans are expected to come due from now through the end of 2012. Although defaults will rise, Lehman said a more likely outcome will be more extensions, leaving bondholders to take the hit on their returns.

BANKS JOIN IN

A flood of performing or nonperforming commercial real estate loans may hit the market as the U.S. Federal Deposit Insurance Corp pressures institutions to sell loans and shore up capital.

"The banks want to sell; the question is, can they sell them?" asked David Dorros, managing director of CB Richard Ellis Group Inc National Loan Sales Advisory Group.

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