CNN/Money: The commercial real estate time bomb

[marmar]

The commercial real estate time bomb
Posted by Carla Fried

July 20, 2009 12:24 pm


There’s a new main character moving to center stage in the great real estate meltdown. Underwater homeowners vying to refinance or score a loan modification have grabbed much of the headlines (and bailout attention) to date. But now commercial real estate is moving into the spotlight as the next potential body slam for the economy.

Last week The Washington Post reported that the U.S. Treasury department has begun to contemplate what can muck things up for the economy and the recovery beyond what is currently being bailed out. This effort has come to be known as Plan C. As in, “Yikes, Plan B might not do the trick, so what do we need to focus on next?”

Reports the WaPo, “The officials in charge of Plan C — named to allude to a last line of defense — face a particular challenge in addressing the breakdown of commercial real estate lending.”

The story line reads like a sequel to the residential debacle: Commercial property owners are sitting on loans that need to be refinanced. The Real Estate Roundtable estimates that about $400 billion a year in commercial loans will need to be refinanced over the next decade. .........(more)

The complete piece is at: http://moneyfeatures.blogs.money.cnn.com/2009/07/20/the-commercial-real-estate-time-bomb/

[trof]

1. I posted about this in the Economic forum.

"The problems will start in January with discussion about the 2011 budget and continue into 2011 and the 2012 budget," said Bronner, director of the Retirement Systems of Alabama, the pension fund for 320,000 active and retired public employees.

In an interview, Bronner said a host of other dangers threaten the U.S. economy and what he calls "the baby recovery" that is just starting to give some people a glimmer of hope:

>> California. He said the nation's most populous state is broke and the repercussions will reverberate nationwide. "It accounts for one-third of the U.S. gross domestic product," Bronner said.

>> International troubles. Bronner said he has never seen so many "flying bullets" that threaten peace and prosperity. He cited everything from North Korean nuclear weapons to the prospect of an Israeli invasion of Iran to a global viral pandemic. "Any could strangle a baby recovery," Bronner said.

>> Real-estate woes. Bronner said about $500 billion of commercial real-estate loans will require refinancing within 18 months because cash flows from rents and leases aren't sufficient to pay the mortgages. Problem is, he said, most of that strip mall and shopping center property is now worth less than it used to be, making it unlikely lenders will extend more credit.

>> Inflation will run rampant in three years to five years, he said, after $2 trillion of government payouts for troubled banks and stimulus spending. It will be worse if $1 trillion is spent on nationalizing the health-care system, he said.

Bronner acknowledged it would be a good investment strategy to bet against the U.S. economy and currency in the short-term. He said the RSA's more than $30 billion in assets is mostly in financial instruments such as stocks and bonds, but that as much as 30 percent is in hard assets such as office and resort real estate and loans to profitable companies.

"It has been important to us to diversify enough to not be total captives of Wall Street," Bronner said.
http://blog.al.com/businessnews/2009/07/alabama_pension_fund_chief_dav.html