Just when it looks like the banks may be putting the residential mortgage mess behind them, commercial real estate loans are a reminder that the real estate sector is just getting ready for round two. This next wave of pain could put a number of bank lenders into the hurt locker.The Wall Street Journal (subscription required) reminds us the $700 billion of commercial mortgage backed securities (CMBS) outstanding are experiencing their first major downturn. The sector will likely suffer two kinds of pain.
First - sloppy underwriting for commercial real estate loans resulted in overly optimistic cash flow assumptions by stupid bankers. With the economic downturn, vacancy rates have cut cash flow well below the ability of many commercial real estate properties to service their debts.
Second - Over $150 billion of CMBS simply mature in the next three years. Given the CMBS market has collapsed and isn't available for refinancing purposes, there is little hope that there will be sufficient loan capacity in the weakened bank market to re-finance many of these loans.
The end result - values will drop further as CMBS go into default causing banks to have to lower commercial real estate valuations in their own portfolios. At some point, banks could be forced into devaluing commercial real estate loans on its own books even if they are performing!
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Tags : commercial real estate loans , commercial real estate , bank failures , real estate bridge loans , private money loans
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