WASHINGTON — Two years after fissures in the residential housing market gave way to a national collapse of home prices and sales, experts warn the next shoe to drop is the commercial real-estate market, bringing more woes to the battered economy.
Thousands of commercial mortgages valued at hundreds of billions of dollars are approaching a renewal date. By some estimates, two out of every three will no longer meet the original loan conditions and won't be able to refinance. And with prices for commercial properties expected to plunge, a vicious cycle may unfold much as it has in the nation's housing market.
"It's the next wave to hit. It's the next round of bad news," said Scott Talbott, the senior vice president of government affairs for the Financial Services Roundtable, a trade group for big banks and other financial institutions who are collectively concerned about the coming problems.
A commercial mortgage meltdown is likely to prolong the nation's economic recovery. The falling prices in commercial real estate will lead to additional bank losses at a time when banks are sapped by home mortgage defaults and soaring credit card defaults. This could lead to future additional taxpayer assistance for the banks.
The reality is already on display. On April 16, the nation's second largest mall developer, General Growth Properties, filed for bankruptcy protection. The Chicago-based company owns more than 200 malls across the U.S., and was unable to renegotiate its debts as they came due.
Six days later, a 40-story office tower on New York's Avenue of the Americas was seized by its creditor, a Canadian-owned pension fund. The tower's owner, Macklowe Properties, couldn't meet loan terms.
"On the street, the rumor is it is coming and it's going to come fast and furious. Some people are predicting September," said Paul Waters, a New York-based executive vice president of brokerage operations in North America for NAI Global, a top-five commercial real estate brokerage with operations across the globe.
Just like the housing meltdown, the commercial real estate crunch is likely to begin as a slow bleed that gains momentum. The coming commercial real-estate crunch is likely to be spread evenly across the nation, in large part because of an outgoing economic tide that's spared few companies anywhere.
"There's going to be a lot of trouble on Main Street with some of these commercial and industrial buildings. The biggest impact will be on some of the smaller owners," Waters said. "The smaller local regional players that are stretched thin may have some great difficulties with their mortgages."
How bad it gets will depend on speed of economic recovery. Office space and multifamily apartments, two huge components of commercial real estate, are highly dependent on employment. Even if the economy begins growing again late this year as forecast, the number of unemployed is expected to keep rising well into next year.
"The translation is that office vacancy rates would continue to rise until mid-to late-2010," said Christopher Cornell, an economist specializing in commercial real estate for Moody's Economy.com, adding that "it's a drag on the recovery" well into next year.
The last crisis in commercial real estate — which includes office space, malls, industrial parks and multifamily apartments — came in the early 1990s. The problem then was an oversupply of new properties. Today, the driver is a deep economic downturn, with the economy contracting by more than 6 percent in each of the last two quarters.