Industry officials warn of commercial real estate disaster

M. Scott Carter

The nation’s commercial real estate market – which includes shopping centers, strip malls, apartment buildings, office buildings and warehouses – is  due to suffer the same fate as the housing market, a group of industry officials warned this week.

Commercial research provider Trepp found that delinquent loans in commercial mortgage securities jumped 85 basis points to 5.65 percent at the end of November, up from just 4.8 percent a month earlier.

In addition, the Mortgage Bankers Association’s Commercial/Multifamily Delinquency Report showed that between the second and third quarters of 2009, the 30-plus-day delinquency rate on loans held in commercial mortgage-backed securities rose to 4.06 percent while the 60-plus-day delinquency rate on loans held in life company portfolios rose to 0.23 percent.

“What we are seeing now is the perfect recipe for disaster in the commercial real estate market in 2010,” said Jeramie Concklin, CEO of Guardian Solutions, a commercial loan restructuring company. “A huge number of balloon payments for commercial property loans are coming due in 2010 and 2011. With vacancy rates at high levels, unemployment soaring and commercial property values plummeting, commercial property owners are not going to be able to service their debt without serious restructuring of their loans and business. Property owners need to prepare now in order to avoid default.”

Local experts, however, disagreed.

David Burnett, of Sperry Van Ness, William T. Strange and Associates, said the best component of the metro area’s commercial real estate market is multifamily housing.

“I am quite biased about the apartment sector outperforming other asset classes,” Burnett said. “The biggest reason why the apartment sector will continue to outperform all others is the continuing availability of financing.”

And maintaining that transactional volume will depend largely on the involvement of HUD and Fannie Mae, he said.

“FHA is fast becoming the go-to source for financing apartment portfolio acquisitions,” he said. “HUD’s 223F program, which can underwrite deals differently than Fannie or Freddie, has been an invaluable source of financing particularly for larger apartment deals.”

In fact, Burnett said, that type of financing didn’t exist for other asset classes and should serve to bolster apartment activity this year. He said the most active source of construction financing was HUD’s 221 d4 program, a non-recourse, permanent loan that is fixed for 40 years.

While Burnett remains optimistic about the area’s market, across the nation the increase in delinquency rates is expected to continue through next year and peak in 2011.

According to government officials, the country has about $300 billion in negative equity overhang that needs to be refinanced in the next two years. Those numbers will only continue to increase as approximately $2 trillion in commercial mortgages are expected to come due for payment within the next five years.

Locally, other experts predict the area’s industrial and warehouse deals will prove to be the market’s strongest area.

“Industrial vacancy only increased about 1.5 percent during the year and rents have held firm,” said real estate analyst Darren Currin. “Furthermore, sales activity in the industrial sector significantly outpaced all other property types.”

The market, Currin said, will be able to retain much of that activity through 2010, making it stable. In addition, he predicted the owners of office complexes would see little change in occupancy or rental rates.

“Office will also continue to exhibit stability as market conditions will remain relatively flat with little change,” he said. “This is good news considering most major office markets around the country are being plagued with soaring vacancy.”

Currin also said the retail market might see improvement, with local and regional tenants expected to continue their expansion.

“Overall vacancy might see some improvement, but do not expect anything significant. The improvement in local retail occupancy will be slow and will probably be about 1 percent at most (in 2010), he wrote in a recent blog post.

However, while Burnett sees potential in the multifamily market due to the assistance of federal financing, Currin said that market would be the weakest because little financing was available.

“Apartments will probably be the weakest as vacancy will increase and investment sales will remain below normal levels as the lack of available credit will continue to hinder investors from making acquisitions,” he said.

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M. Scott Carter writes for Dolan Media News Services in St. Louis, Mo.