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A shakeout in commercial real estate

Alisa Roth Jan 25, 2010

A shakeout in commercial real estate

Alisa Roth Jan 25, 2010


Kai Ryssdal: You can blame the banks for not lending. Or you can blame the stubbornly high unemployment rate. Whatever the reason, the real-estate market is still suffering. A report out this morning showed sales of existing homes — or used homes, if you feel that way about it — fell sharply last month. But if the residential market looks bad, the commercial market looks all the worse.

We have told you about homeowners walking away from their mortgages, right? Today we learned a big development company has walked away from the most expensive single residential property deal ever made in the United States. An 11,000 unit development in New York called Stuyvesant Town. Developers took a $4.5-billion loan to buy it a couple of years ago. Now, being what the market is, they can’t make their payments. And so they have called it quits.

Marketplace’s Alisa Roth says the same scenario is playing out all over the country.

ALISA ROTH: In some ways, the Stuyvesant Town story is uniquely New York. But part of it is pretty universal: When real estate was booming, banks all over the country made big loans to property developers. And now, those borrowers are having a hard time making payments.

Richard Parkus is head of commercial real-estate debt research at Deutsche Bank. He says this is just the beginning of the shakeout. Because there are still a lot of commercial loans that need to get rewritten.

RICHARD PARKUS: And that may entail the foreclosure and liquidation of properties and new loans being written on those properties, new buyers owning those properties.

Parkus says we’re in for a volatile stretch in commercial real estate.

PARKUS: Whether this will lead to sort of another, you know, turning point downward in the economy, I don’t believe it will.

But even if the wider economy isn’t at risk, community and regional banks already are. That’s because many are highly exposed to commercial real-estate loans.

Sam Chandan is CEO of Real Estate Econometrics. It’s a research firm. He says those banks are also often the most important lenders in their communities.

SAM CHANDAN: So whether it be a loan for a small home improvement, whether it be a loan to help you open a business, whether it be an education loan, there are all sorts of mechanisms for accessing credit that depend upon healthy community and regional banks.

And he says, bad commercial real-estate loans have helped put dozens of these banks out of business already. If commercial borrowers continue to default, or walk away, we’ll see many more.

In New York, I’m Alisa Roth for Marketplace.

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