This should be a scary sign to anyone who who hopes the commercial property market holds up better than the residential market. Commercial property developers are asking to be included in a $200 billion loan program, as they claim the lack of credit is making refi’s impossible:
They’re warning policymakers that thousands of office complexes, hotels, shopping centres 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.
The prospect of mass defaults is a scary prospect for banks and their battered balance sheets, so we wouldn’t be totally shocked to see some type of government action. That being said, there’s probably a reason lenders are so stingy with respect to commercial property mortgages: the fundamental don’t look good. Retailers are going bust, which will translate to empty storefronts at shopping malls. Office vacancies are on the rise. In New York, just the hedge fund bust alone is reducing demand for office space. There obviously needs to be some type of industry contraction, if only so that the ones left standing can consolidate and become profitable with diminished competition. One problem with all these bailouts is that we’re trying to smooth over bust cycles, eliminating capitalism’s darwinian effect, which insures that the players who survive are the healthiest and best in the industry.