be the Next to Fail?
May 12, 2009
We’ve seen this movie before: rising real estate values, lax lending standards, excessive leverage, securitization of loans to minimize risk for investors, oversupply relative to demand, plummeting prices, delinquencies, defaults… the all-too-familiar story that played out in the residential mortgage market.
And we know how that movie ended. Will the commercial mortgage market’s fate be the same?
If you’ve read a headline foretelling the next shoe to drop or domino to fall lately, it was probably about commercial real estate. Widespread defaults in the commercial lending market would be devastating, as they were for Lehman Brothers, whose bankruptcy was precipitated by nearly $30 billion troubled commercial loans.
While the current market is far from safe, however, reports of impending doom are greatly exaggerated.
The commercial property market is sizable – the properties that make it up together value roughly $5.3 trillion – with approximately $3.5 trillion currently financed (compared to approximately $11 trillion of residential mortgage debt). Of that $3.5 trillion, $814 billion is due to mature between 2009 and 2011, according to Foresight Analytics.
Foresight is a California-based consulting firm that serves institutional investors and lenders. Co-founder Matt Anderson told me he expects delinquencies and defaults to rise in the near term, but unless the recession is longer and more severe than most predict, commercial real estate may escape relatively unscathed.
Anderson is most concerned with the chunk of loans that will mature over the next few years, shown in orange below, which correspond to loans made during the peak of aggressive lending practices in 2006 and 2007:
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