SOURCE: National Association of Realtors

National Association of Realtors

November 13, 2009 20:23 ET

Commercial Real Estate Market Continues to Suffer From Credit Crunch

SAN DIEGO, CA--(Marketwire - November 13, 2009) - A severe ongoing credit crunch in commercial real estate lending is hampering recovery, according to a commercial market update at the 2009 REALTORS® Conference & Expo. NAR Chief Economist Lawrence Yun shared insights into the commercial markets and the current lending environment during the "Economic Issues and Commercial Real Estate Business Trends Forum" here today.

Yun said the recent severe economic downturn and high unemployment continue to impact commercial real estate markets. "The commercial real estate market continues to struggle in this difficult economy, with rising vacancy rates and falling rents," said Yun. "Commercial transactions and sales are down across the country from the virtual lack of available credit -- banks are not lending and mortgage-backed securities are virtually nonexistent. The government needs to take action to relieve some of the lending pressure."

According to Yun, the commercial real estate market price movement of the past 10 years closely mimicked the rise and subsequent fall of the residential housing market, even though commercial underwriting standards were far more prudent than those of residential subprime and other risky mortgage loans. Yun said in the current market the federal government is not backing commercial loans as it is for the residential home market.

While commercial REIT equity issuance increased recently because of positive increases in the U.S. stock market, the flow of capital into the commercial real estate market remains weak because lenders remain very reluctant to lend, said Yun. Data from Real Capital Analytics shows that the largest source of financing for commercial projects under $5 million is currently local and regional banks, which helped fund nearly 48 percent of recent transactions. Yun said there are many small regional banks that weren't involved in risky lending in recent years and aren't suffering from large amounts of loan defaults like some of the larger banks.

The lack of credit has also led to a dramatic increase in seller-financed transactions. This type of financing previously accounted for less than 1 percent of transactions; recently this number has jumped to nearly 13 percent.

Like the residential housing market, commercial defaults have dramatically increased among all property types, especially the retail and multifamily sectors -- and Yun predicts that defaults will continue to rise for the next six to 12 months.

Yun estimates that $800 to $850 billion in commercial loans will mature in the next 2 years and will require refinancing. "Policymakers need to step in and address some of the continuing lending problems in the commercial real estate market by developing policy or regulations to help facilitate the refinancing of these large, looming commercial loans," said Yun.

Yun ended his presentation with a prediction that the commercial real estate market could see more weakness before lending and transaction activity improves in mid- to late 2010.

"Despite all of the challenges in the market, I expect to see some modest improvement in commercial lending to small business owners and commercial projects next year as banks become more stable," said Yun. "This could happen even sooner if the Federal Reserve stepped in with clearer rules and guidelines about refinancing commercial loans."

The National Association of Realtors®, "The Voice for Real Estate," is America's largest trade association, representing 1.2 million members involved in all aspects of the residential and commercial real estate industries.

Information about NAR is available at www.realtor.org. This and other news releases are posted in the News Media section.

REALTOR® is a registered collective membership mark which may be used only by real estate professionals who are members of the NATIONAL ASSOCIATION OF REALTORS® and subscribe to its strict Code of Ethics. Not all real estate agents are REALTORS®. All REALTORS® are members of NAR.

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