Commercial Property next US bailout industry?

Karl FitzgeraldCommentaryLeave a Comment

Yes, vacancy!  :-)
Creative Commons License photo credit: °Florian

C’mon you can’t be serious but that’s what the lobbyists are looking for with commercial property in dire straits in the US. The NY Times reports:

Just as home loans were pooled, then carved up and sold to investors as securities over the last two decades, commercial property loans were repackaged for the financial markets. In 2006 and 2007, nearly 60 percent of commercial property loans were turned into securities, according to Trepp, a research firm that tracks mortgage-backed securities.

Now that the market for those securities has dried up, borrowers cannot easily roll over the loans that are coming due.

Many commercial property owners will face a dilemma similar to that of today’s homeowners who cannot easily get mortgage relief because their loans were sliced and sold to many different parties. There often is not a single entity with whom to negotiate, because investors have different interests.

Experts expect commercial vacancy rates at close to a shocking 20%. But as we have shown in the Melbourne residential market, vacancy rates here are at close to 10% due to speculative vacancies. Now that speculators have left the US property market, the prices paid at the peak of the market are uneconomic. But yet:

In recent weeks, a group led by the New York developer William Rudin has pleaded with Treasury Secretary Henry M. Paulson Jr., Senator Charles E. Schumer, Democrat of New York, and others to have the government include commercial real estate in a new $200 billion program intended to spur lending.

Here we have again some of the world’s wealthiest people pleading for a bailout on an investment that they paid too much for. It’s like giving  free money to a gambler. Even if developers get attractive re-lending rates, who will rent the property off them when there are so many vacancies? The market power that renters will have over the next few years will ensure they drive down prices.

This is a desperate move to try and pry open access to attractive interest only loans. The strategy will be to re-finance on a 5 year interest only loan, by which time the economy may have recovered and the resultant capital gains can pay off the principal with a timely ‘property flip’. But will this allow the property to remain vacant over this time? This will hold productive business to ransom whilst the speculative economy benefits from handouts.

Let the market work its’ magic.

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