Two reasons why CRE is the next domino to fall

By Geert De Lombaerde Posted on September 1, 2009 at 6:44 am

The first, say the Journal’s Lingling Wei and Peter Grant, is bad underwriting — the commercial equivalent of making mortgages to people who couldn’t afford them — that already is making its way through the system. The second factor will take a little longer to fully manifest itself.

By the end of 2012, some $153 billion in loans that make up CMBS are coming due, and close to $100 billion of that will face difficulty getting refinanced, according to Deutsche Bank. Even though the cash flows of these properties are enough to pay interest and principal on the debt, their values have fallen so far that borrowers won’t be able to extend existing mortgages or replace them with new debt. That means losses not only to the property owners but also to those who bought CMBS — including hedge funds, pension funds, mutual funds and other financial institutions — thus exacerbating the economic downturn.

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Tags: commercial mortgage-backed securities, commercial real estate, credit, debt, financial instruments, refinancing  

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