The commercial real estate ("CRE") industry continues to struggle as financing sources remain slim. The Mortgage Bankers Association ("MBA") reported that a survey of multiple US regions found low volume in real estate transactions, driven by tight credit. Several sources seem to agree that credit will not become more available in the near future because, despite signs of improvement in overall bank health, the banks remain burdened by bad debt and the prospect of more as billions of dollars in CRE-secured debt matures in the coming months.
This issue is a prime concern for many industry professionals. The Commercial Lease Law Insider recently reported on a study released earlier this month by Ernst & Young LLP that looked at this issue. EY talked to 40+ major funds; the results of their study indicated that the biggest concern in today's market is the large amount of commercial mortgage debt that will mature in 2010 and 2011, and the dearth of refinancing options available to cover that debt. 92% of those funds surveyed by EY believe that the US economy will not recover until after 2009. (A copy of the EY study can be accessed at their website through the link above in this paragraph.)
Mixed messages abound with respect to the lending industry. Treasury Secretary Timothy F. Geithner told the press at a recent briefing that there are "early signs of repair and improvement" in the banking industry. Those signs include rising profits and bank share prices, success in raising more than $200 billion in additional capital, and government approval for ten banks to repay $70 billion in bailout funds (see, e.g., a June 10 Wall Street Journal article). Despite the positive signs, though, the banks still face the pressure of the bad loans on their books. According to a June 11 Business Week article (citing a recent Deutsche Bank report), US banks hold around $1 trillion in commercial real estate loans, many of which will mature in the next twelve to eighteen months. With few refinancing options currently available, it's reasonable to assume that number of loans-in-default on bank books will swell in the months to come. In fact, the Business Week article mentioned the skepticism of some regarding the recent encouraging stress test results, pointing out that those results may have been premised on faulty assumptions about the state of the economy, including unemployment numbers, and the extent of losses the banks can expect to suffer in coming months. Some lawmakers are calling for the stress tests to be run again, with tougher "worst-case-scenario" assumptions, in an attempt to get a more realistic picture of the banks' condition. (See Dow Jones Newswire article.)
The Business Week article estimated bank losses at nearly $500 billion if the current recession plays out as projected. Those numbers don't bode well for the lending climate; if banks have to use profits to deal with losses well into the future, those moneys will not be available for funding future real estate projects that are needed to help the CRE industry get back on track. The MBA recently reported on this issue, talking to various industry insiders about their ongoing concerns.
