Wringing In The New Year

A new year is upon us, full of challenge and promise. All over the country people are looking forward to making this a better year than 2008 was.

In the world of commercial real estate (CRE), however, and in the economy in general, a darker scene at the start of a new year has rarely been encountered.

Without getting maudlin, it's true that experts, economists, and CRE professionals are making the same declaration: let's just get through it and see who's left standing.

Even though CRE remains in "better shape than some other industries", with "good balance between supply and demand", "modest" vacancies and loan default rates that have "so far hovered at a rock-bottom 1 percent", banks are reluctant to lend out the cash they have been given by the Treasury Department.

And that's a bad thing, a very bad thing.

For example, in the European markets, banks have been provided massive injections of cash, assuring that there is enough in the system to begin moving the credit process forward.

However, instead of lending, the European banks are hording. They are routinely parking over 200 billion euros, overnight, with the Central European Bank.

This does not inject cash into the lending process, even between the banks themselves. Credit, therefore, remains scarce and very difficult to obtain.

In the world of CRE, the real concern right now is not with financing for new commercial real estate acquisitions. Those loans will get done, albeit with more conservative underwriting than in years past.

The real concern is with the refinancing of existing loans coming due this year. More than $1 trillion of both short-term and 10-year fixed rate CRE loans come due in 2009, each posing a different type of problem to hurdle.

The short-term bridge loans that were underwritten during the go-go days of the real estate boom were very aggressively underwritten - with high leverage, interest-only considerations, questionable assumptions about vacancy absorption, or unrealistic expectations on rental rates.

What happens with these under-performing loans when they come due? Will banks play hardball, causing an avalanche of foreclosures? Or will they realize the need to tread lightly?

If lenders require borrowers to inject additional cash into their investments in order to secure new financing, many cash-strapped borrowers will end up defaulting on their loans.

In addition, loans that closed 10 years ago with lenders in the commercial mortgage-backed securities market (CMBS) will also be coming due this year.

Those lenders no longer exist. They have gone the way of all flesh. What lenders will be willing to step up to do the enormous amount of refinancing required just to maintain the status quo?

Despite massive bank bailouts by the Treasury Department, little seems to be exiting those banks for the benefit of real investors. This is why CRE groups have been meeting with Federal Reserve officials, Treasury workers, and their members of Congress, asking for relief from this impending problem.

It's not insignificant. And if what is predicted plays out, the effect on corporate America and the economy will be just as bad as any other industry that falters.

Sources:
Financial Week, Dec 29 LIBOR Rates Fall As Banks Tap Other Sources Of Funds
Erika Morphy, GlobeSt.com, Dec 23 CRE Clarifies Its Fed Request
Amy Cortese, The New York Times, Dec 28 A Wish List For Commercial Real Estate