Commercial Real Estate Loans, A Refinancing Time Bomb?

Like it or not, we could be locked in between two forces heading towards each other at breakneck speed, our fates depending on which one reaches us first. In one corner we have the economy, a once seemingly unassailable force of nature, now hobbled by recession and slowly trying to recover. In the other corner there looms billions of dollars worth of commercial real estate loans, quietly waiting as the seconds tick off towards their maturity date. We stand in the middle, our fates tied to the outcome of this race. 

If the economy recovers before the proverbial time bomb of CRE loans detonates, we should be fine. In the next five years, nearly half of all commercial real estate loans mature, Deutsche bank predicts that around 65% of these will not qualify for refinancing. This could represent either a large opportunity or threat, depending on our state of affairs. If the economy has recovered, unemployment is down, credit is flowing and consumers are spending, the glut of properties available to the market should be eagerly grabbed by buyers.

However, if there has been little or no recovery, there is a good chance those properties will lay vacant, property values will drop and banks will be flooded with assets taking a loss. Already there is dire news, July saw a 5.1% drop in the commercial property price indices, marking a 39% fall from its October 2007 high. Furthermore, according to Real Capital Analytics, the number of commercial property sales which are classified as "troubled" (properties in default or close to it) almost doubled to 23%  in July from March. Total commercial real estate sales through July of this year have been about 1/3^rd of those last year. There has been positive news as well, as Fitch Ratings reports the credit outlook for retailers has improved over the course of 2009.

We know the economy will improve but as with all things, timing is everything. 2012 marks the year most of these loans come due, by then the economy is projected to have mostly recovered. If that is the case, then disaster will probably be averted and 2012 could mark a period of substantial growth and recovery. If not, 2012 could be remembered as an ugly cliff from which we had a nasty fall.