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Real estate woes seep into malls, office towers

The Treasury readies $1 trillion to buoy faltering properties.

By Ron SchererStaff writer of The Christian Science Monitor / March 9, 2009

New York

Now it’s the real estate developers who are slated to get a bailout.

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By April, the federal government expects to have a plan to refinance office towers and shopping centers in danger of defaulting. The scale is likely to be massive: Last week Federal Reserve Chairman Ben Bernanke hinted at providing another $1 trillion in credit.

The goal, he said, is to head off a “looming crisis” that could spread far beyond “For Rent” signs and shuttered mall shops. For now, commercial delinquencies are few. But office vacancy rates are heading toward record levels, according to one estimate, and banks are exposed, with $1.72 trillion in commercial real estate loans outstanding as of Feb. 18.

Just as significant, many insurance companies and pension funds have invested in real estate, putting them at risk, as well.

“The need is urgent,” says Kenneth Rosen, a professor of real estate at the University of California in Berkeley. “It is important to get this done before we have another problem.”

Due: $300 billion

This year some $300 billion in loans to developers are due to be refinanced by commercial banks. Given the decline in the economy, many real estate ventures might not be able to survive if they are not able to refinance their loans on better terms more reflective of today’s economic conditions. But banks are largely refusing to refinance as the properties drop in value.

Any bailout of real estate developers – some of whom are known for their extravagant living (think Donald Trump) – would essentially be part of the continuing bank rescue. “The banks have significant exposure,” says Mr. Rosen.

To help free up money for commercial real estate, the US Treasury and the Federal Reserve are expected to offer refinancing through a federal program called the Term Asset-backed Loan Facility (TALF) next month. TALF is already providing a backstop for securitized debt such as credit cards and auto loans.

Skyscrapers and pension funds
Yet the concern for the commercial real estate market goes beyond banks to the insurance companies and pension funds who have invested in real estate or made loans to real estate developers.

“Now, to some extent, there is the potential to spread the financial crisis to insurance companies and peoples’ pensions,” says Jon Southard of CBRE Torto Wheaton Research, a real estate research company in Boston.

The impact of the current downturn is already being felt. The market for the packages of loans sold to investors, called Commercial Mortgage Backed Securities, has frozen completely since July. Now, even the highest-rated packages – for those ventures seen as having virtually no risk – are being marked down to produce a 11 to 12 percent interest rate.

The concern is that some large bank will be forced to sell its holdings, overwhelming the market, says Mr. Southard. “The banks are not necessarily in this as a long-term holding,” he adds.

With virtually no new loans available for new commercial buildings, “everything is being postponed,” says Rosen. “There won’t be any new construction in 2010 or 2011.”

Many of the problems for real estate moguls are being caused by the recession. With layoffs, firms are downsizing their office space needs. The national vacancy rate for offices at the end of 2008 was 14 percent, up from the recent low of 12.5 percent in the middle of 2007, Southard estimates.

“But we think it will top 20 percent in 2011,” he says. That would be an all-time high.

Lower rent prices?