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Real Estate Developers Ask for a Bailout

The WSJ and the Washington Post report that some of the country's biggest commercial property developers have sought out government assistance as debt comes due.

Although the numbers vary by source, roughly $530 billion in commercial mortgages will be coming due in the next three years, with $160 - $400 billion coming due in 2009. Although delinquency rates have begun to rise as rent prices fall and vacancies rise for commercial properties, the delinquency rates are still below historic levels (i.e the vast majority of these loans are performing).

The problem is these types of loans are underwritten for five, seven, or 10 years with a balloon payment due at maturity. At maturity the loan is typically refinanced by the developer. But the credit markets are virtually frozen (in large part because hardly anyone is securitizing commercial mortgages) and no credit is available for refinancing.

To solve this problem, developers are asking the Treasury and the Federal Reserve to include the commercial real estate industry in the $200 billion loan program to rescue the consumer debt market, money intended to help investors purchase securities backed by those assets. Developers hope that including commercial real estate will encourage banks to refinance mortgages coming due because the banks could securitize the mortgages. Some developers have gone one step further and asked the Treasury to set up a separate fund just for commercial real estate.

The Treasury and Federal Reserve have said they will consider including commercial real estate in the $200 billion loan program.

Unfortunately, including commercial real estate in this loan program may not be enough to save the industry if only $200 billion is available and $160-400 billion in loans are coming due in 2009. Even if the program includes enough money to cover commercial real estate, Lenders may not be able to underwrite the loans; they may not be able to accurately price the assets because of plummeting property values.

Full post as published by Womble Carlyle Constrution Industry Blog on December 23, 2008 (boomark / email).