Commercial real estate lurks as next potential mortgage crisis

Bad lending and plummeting property values are leading to foreclosures that may deliver another blow to the economy.

By Source: Lingling Wei and Peter Grant, Wall Street Journal September 1, 2009

Federal Reserve and U.S. Treasury Dept. officials are scrambling to prevent the commercial-real-estate sector from delivering a roundhouse punch to the U.S. economy just as it struggles to get up off the mat, according to the Wall Street Journal .

Their efforts could be undermined by a surge in foreclosures of commercial property carrying mortgages that were packaged and sold by Wall Street as bonds. Similar mortgage-backed securities created out of home loans played a big role in undoing the residential sector and triggering the global economic recession.

Now the $700 billion of commercial-mortgage-backed securities (CMBS) outstanding are being tested for the first time by a massive downturn, and the outcome so far hasn’t been pretty. Mounting foreclosures in the CMBS sector would likely depress values even further as property is dumped on the market.

The commercial-real-estate market could yet be salvaged by an improving economy and bailout programs coming out of Washington. In addition, capital markets are starting to ease for publicly traded real-estate investment trusts. Still, most of the $6.7 trillion in commercial real estate is privately owned. Also, it is unlikely commercial real estate will benefit much from an early stage of an economic recovery. What landlords need is occupancy and rents to rise, and that means employers have to start hiring and consumers need to shop more.