Below The Beltway

Steven Pearlstein talks about the impending commercial real estate crisis:

Commercial property values have fallen an average of 35 percent, with further declines expected as the recession drives more tenants out of business or puts them behind in their rent payments. The process of securitizing new loans has ground to a complete halt, and the limited financing that’s available now comes from banks and insurance companies on much tougher terms. Loans now are typically for no more than 60 percent of a property’s current value, with an interest rate four percentage points above the Treasury rate. Borrowers must also repay principal, which is like adding another two percentage points to an interest-only loan.

You can see evidence of the impact of that all around, even here in Northern Virginia which has been shielded from some of the worst effects of the recession Multi-million dollar office buildings that were started while the market was still booming are completed and more than half empty. Strip malls have more empty spaces than they have in the past, and strip mall projects that were supposed to have been completed by Spring 2009 haven’t seen so much as a tree knocked down on the site they were to be built on.

But the impact of the commercial real estate crisis go far beyond a few empty office buildings or not enough Chinese restaurants:

[L]ocal and regional banks have so many souring commercial real estate loans that they have begun to fail at a rate not seen since . . . well, you know.

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Then there’s the matter of half a trillion dollars in securitized loans that were made during the bubble and will be coming due over the next few years. These will need to be refinanced. Unless the securitization machine can be cranked up again, there’s simply not enough lending capacity at the banks and insurance companies to fill the gap. Moreover, there can be no refinancing until the current owners of the buildings come up with billions of dollars in fresh equity to make up for what has already been lost.

(…)

In the case of buildings that still generate rents sufficient to pay the monthly interest charges, the lenders — that is the holders of the mortgage-backed securities — will probably agree to extend the loan for a few years in the hope that property values quickly rebound and the market for securitized loans revives. “Amend, extend and pretend,” as my friend Arthur, the real estate maven, put it.

In the case of projects with rising vacancies and falling rents, however, the more likely scenario is that the lenders would foreclose on the property and sell it for whatever they can get. The problem is that if too many buildings are dumped on the market at the same time, it would trigger a self-reinforcing downward cycle that could depress property values even further, leading to more foreclosures and causing even more banks to fail. That’s what happened back in the savings and loan crisis.

Sound familiar ?

This ain’t over yet, by any means.