(Source: Steve Brown The Dallas Morning News (MCT) — Although the commercial real estate sector has so far escaped the severe downturn that’s hit U.S. housing, industry leaders are fretting that there’s still a lot of hurt ahead in cities across the country.
“There is a lot more to come — a lot of pain,” said Bob Jacobs, chief investment officer of Denver-based commercial property firm Broe Group. “There has been a crash.
“But it’s not as high-profile and political as the single-family home bust,” Jacobs said Thursday at a meeting of the National Association of Real Estate Editors.
Commercial property prices and activity have already started to recover in many U.S. markets, including North Texas. And property values and foreclosures never reached the levels some predicted when the recession hit in 2008.
Still, billions of dollars’ worth of properties have gone into foreclosure in Dallas and other major markets.
And there’s more woe on the horizon, industry leaders say.
“It’s a miserable slog through this mess,” said Marcel Arsenault, chairman and CEO of Real Capital Solutions, a nationwide investor in properties.
Arsenault said the Federal Reserve’s move to lower mortgage rates to record-low levels has masked a lot of problems for commercial real estate.
“I think it’s a false recovery,” he said, and interest rates will rise as the economy improves. “At that point, the other shoe is going to drop.
“That is going to take our industry down” if finance costs bump up, Arsenault said.
There’s already a big debt overhang.
More than $1 trillion in commercial property loans that will come due in the next couple of years will be almost impossible to refinance because of reduced values and tougher lending standards, property analysts warn.
“The big crash that’s coming is all those loans coming due in commercial real estate,” said Bill Hoffman, CEO of Trigild, a commercial property asset management and receivership firm.
Hoffman said the number of problem commercial properties that his firm is handling is even greater than during the 1980s savings and loan crash.
“We are probably handling three times as many properties as we did at that time,” he said. “I don’t think it’s going to get better for a while.”
Banks and commercial mortgage investors have put off the worst of the sector’s downturn by deferring action on many problem properties, hoping the economy recovers first.
“In general, the banks have been slow to recognize their losses. They don’t have the capital to withstand those losses,” Jacobs said. “They are basically instructed to put those assets in a drawer and don’t take them out for five years.”
“This is just postponing a recovery,” he said. “It’s been put off for a number of years because people don’t want to recognize the true values.”
But the alternative — for the lenders to have jumped to foreclose — would have been worse, said Ken Riggs, president of Real Estate Research Corp.
That’s what happened in the savings and loan crash.
“If they would have just dumped it like they did in the ’90s, you would have a total liquidity crisis in commercial real estate,” Riggs said. “They are restructuring and resolving a lot of this.”
And Riggs said he isn’t as concerned that low mortgage rates will lull the industry into a trap.
“They will come back to haunt commercial real estate” at some point, he said. “But right now, our clients are throwing on as much leverage [debt] as they can.”
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