NAR: Commercial Downturn in Early Stages

Washington, DC, May 18, 2009--Credit availability and refinancing issues have seriously affected commercial real estate markets, but recent actions by the Federal Reserve may help ease the crisis, according to presentations at a commercial real estate forum today at the Realtors Midyear Legislative Meetings & Trade Expo.

National Association of Realtors Chief Economist Lawrence Yun said a commercial downturn is in the early stages.

“Commercial real estate is the hardest hit industry outside of the auto industry,” Yun said.

“A recovery in commercial real estate always lags a general economic recovery, but with the right policy prescriptions we can recover more quickly.”

While the commercial and multifamily real estate industry plays a vital role in the economy, it has been facing its worst liquidity challenge since the Great Depression. Hundreds of billions of dollars in commercial loans are expected to mature this year, and more than $1 trillion will mature over the next few years.

Without greater liquidity, commercial borrowers would face a growing challenge of refinancing debt, with a threat of rising delinquencies and foreclosures that could cause widespread damage to the overall economy. Over the past year, commercial investment transactions have essentially ground to a halt.

Yun said that commercial loan delinquencies had been stable at about 1 percent, but have risen recently to about 5 percent due to a lack of refinancing activity.

“Right now cash is king, and buyers with cash are in the best bargaining position,” he said. “With so few transactions taking place, a pent-up demand may be building.”

Yun said commercial fundamentals are weakening but are better than in the last downturn in the 1990s.

In response to the liquidity crisis, the Federal Reserve Board recently announced that starting in June, commercial mortgage-backed securities will be eligible collateral under the TALF. The FRB also authorized up to $100 billion in TALF loans with five-year maturities to help investors finance CMBS purchases. TALF loans currently have maturities of three years.

NAR, which had been advocating extension of the maturity terms, is also asking Congress to enhance federal tax policies that strengthen the commercial real estate market, such as maintaining the capital gains tax rate at 15 percent.

“Raising the capital gains tax would have the effect of lowering commercial property values, so we’re hopeful they’ll leave it where it is,” Yun said.