Tishman deal fails: sign of trouble in commercial real estate

But fast-forward to today: Now, the property is valued at $60 million, reflecting lower rents and occupancy. And lenders will no longer lend 95 percent, but rather 60 percent. That’s $36 million for the same property that they lent out $95 million in 2005.

“The difference between $95 million and $36 million is what we call the ‘equity hole.’ Because if the property really needs to borrow $95 million to keep things afloat, it will have to cough up the difference out of pocket, or from whatever pocket it can find,” Calanog says.

Yet the case of Stuyvesant Town is not a theoretical loan. Calanog estimates the total nominal outstanding debt at $4.4 billion, but the underlying property to be valued at only between $1.5 billion to $2 billion.

US banks have been steadily building their reserves to account for their losses in the commercial real estate market, says Fred Fraenkel, chairman of investment policy at Beacon Trust Co. in Madison, N.J.

“They have been increasing their loan losses by billions of dollars per bank per quarter,” he says.

In fact, the problems in the commercial real estate market will keep the economy from rebounding more strongly, Mr. Fraenkel thinks. And they will be a factor in the Fed’s decision on raising interest rates, he says.

Last year, Federal Reserve Chairman Ben Bernanke talked about the possibility that the Fed might have to supply up to $1 trillion to prevent the commercial real estate market and some other areas, such as the student-loan market, from collapsing.

While the residential housing market has finally stabilized, some analysts expect the commercial real estate market to continue to slide in value.

“Nonresidential construction is about midway through its downturn,” predicts Patrick Newport, a housing economist at HIS Global Insight in Lexington, Mass.

But it could get worse, Mr. Newport worries, because a lot of hedge funds and other real estate investors are now investing in Brazil and China, which are growing faster than the US.

“If people are not putting up money here, the commercial real estate market may stagnate for sometime,” he says.

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