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Corner Office from Marketplace

Commercial real estate also suffering

Marketplace Staff Feb 21, 2008
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KAI RYSSDAL: Residential real estate’s been suffering over the past year or so. That much we all know. But during the slide in home values you kind of got the feeling commercial developers were holding their own. And it makes sense, right, because the people doing deals for pricey office buildings aren’t amateurs likely to get themselves stuck in an exploding adjustable rate mortgage. That might be true. Still, Marketplace’s Lisa Napoli reports not all is well.


LISA NAPOLI: I’m standing on the edge of what’s going to be a $3 billion development in downtown Los Angeles. A 1.2 million square-foot hotel-retail-residential project. They were supposed to break ground at Christmastime, after being delayed twice earlier last year.

The problem is the developer can’t get a loan. And when it does it’ll have to put down three times the money than it would have in recent years. And pay higher interest rates.

If you want to buy an existing office building, the till is tightening up there too. With commercial real estate following residential down the drain, lenders are in no mood to take chances.

JACK KYSER: Right now, risk is a four-letter word in the financial community. And any lender is being ultra-cautious, even people that have impeccable credit.

That’s Jack Kyser of the Los Angeles Economic Development Corporation. He says, just like the residential market, everyone was clamoring to get into the commercial real estate game. Banks helped things along by buying mortgages and repackaging them into bonds. But with commercial property values falling, and investors running scared of real estate, nobody’s buying these bonds anymore, and that means a lot less money to fund real estate deals.

Mike Swarkovski works for CapitalSource, a finance company. He says last year was a record year for commercial real estate. But year to date, there’s been a 90 percent dip in sales, and that’s just the beginning.

MIKE SWARDOVSKI: All these things suggest the market’s anticipating about $185 [billion] to $200 billion of U.S. commercial real estate losses over the next several years.

Buyers who borrowed big and paid top-dollar for properties are already feeling the pain. Take real estate titan Harry Macklowe. He got $7 billion in short-term loans to buy marquee office buildings in New York last year as the market burned red hot. Now he’s been served with a default notice.

Commercial defaults aren’t widespread yet, as they are in residential.

But Bob Bach, senior economist with Grubb & Ellis, says there’s a lot of scrambling going on:

BOB BACH: Loans are coming due and buyers will either have to put more equity in the property or they’ll have to sell or maybe renegotiate the terms with their lenders.

That’s hard to do right now because of the climate of uncertainty:

BACH: Nobody’s really sure about where values are going to settle.

In the end, everyone gets hit. As their borrowing costs rise, property owners will charge higher rents. That could mean slimmer profits for American companies and tighter belts for their employees. Local governments will wind up taking in less too as tax values and income decline.

Bob Safai of commercial brokerage Madison Partners says it’s a vicious cycle:

BOB SAFAI: It affects everybody because when transactions do not occur, when people get laid off, when corporate America can’t grow because they can’t borrow money for growth, it takes the economy and puts a stranglehold on the economy.

And it doesn’t look like the credit crunch is going to loosen its grip any time soon.

In Los Angeles, I’m Lisa Napoli for Marketplace.

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