Is commercial real estate the next bubble?
Dan Tishman is worried about the commercial real estate loan market—and that should worry you, too. As CEO of Tishman Construction and a fourth-generation scion of one of New York's premier real estate families, he knows the market up, down, and sideways.
Last month, Tishman, appearing on CNBC, said that the commercial real estate loan market could be the “second shoe to drop” now that housing bubble has subsided a bit.
Citing “staggering” numbers, he noted that $3.4 trillion in commercial real estate loans initiated in 2007 (versus $1 trillion in 1988) will be rolling over in the next 5-7 years, and “the capacity [to refinance those loans] isn't there.” Anywhere from 20% to 50% of loans held as commercial mortgage-backed securities could already be under water, he said.
The key: Weak properties that were “more speculative in nature” are dragging down “good assets” that are generating cash flow but can't get refinancing. “One property being acquired and then being lent on and lent [on] created this,” he said. “I don't see values for commercial real estate coming back for two to three years.”
The scary part is that it's not just Tishman who's worried. He referred to no less a figure than Lawrence Summers, director of the White House's National Economic Council, who just days before Tishman's CNBC appearance stated publicly that he had “a real concern” about the commercial real estate market. “I don't think there's any question that there is substantial distress in that sector. You have already seen substantial price adjustment,” he said.
Summers said that unlike the commercial downturn of the 1990s, which was fueled by speculation and overbuilding, the current situation has its roots in the financial markets and will likely require government intervention to resolve.
There is already cause for concern. According to Oakland-based Foresight Analytics, delinquency rates for nonresidential construction rose to 10.4% in Q2/09, three times the rate at the previous peak in Q3/01.
As for solutions to the macro problem, Tishman told CNBC that the government should extend the TALF program (for the elegantly named Term Asset Backed Securities Loan Facility), which has been pumping billions into the commercial market, in order to give those “good properties” two or three years of breathing room to refinance.
But with the healthcare debate sucking up all the air inside the Beltway, coupled with the belief (perhaps overly optimistic) that the nation is starting to weather the storm in the housing market, it's unlikely that the powers that be in Washington will get anything done in time to properly address the pending crisis in commercial lending.
To paraphrase the immortal Bette Davis, “Fasten your seatbelts. It's going to be a bumpy 2010!”—Robert Cassidy