Commercial Real Estate to Spark Another Crisis?
Many real estate experts are warning that we may be headed for another real estate crisis, this time caused by the commercial sector. There are reportedly trillions of dollars of commercial loans that will become due over the next several years, many of which were made at the height of real estate peak and are now underwater, meaning that the borrowers now owe more than the property is worth.
The commercial real estate sector differs from housing in several key ways. Housing loans are typically made with a 15 or 30 year term and the borrower makes monthly payments with the goal of paying it off during the life of the loan. Commercial loans, however, are usually refinanced every three to ten years, which, under normal conditions, is not a problem. But, since the beginning of the recession we're currently suffering through, commercial property values have fallen by about 40 percent. Many of those peak year loans that are due for renewal are in trouble, and experts say the effects could ripple throughout the broader US economy.
Failure of businesses caused by their inability to repay loans could lead directly to job cuts, and banks, if faced with more losses from loan defaults, could tighten lending standards further, further hindering an already sluggish economic recovery. Commercial real estate brokers around the country are reporting growing vacancy numbers in retail storefronts. A major problem facing shopping malls and retail centers is filling vacancies without creating too much competition amongst tenants. With consumer spending down, retail landlords must ask how many furniture stores or electronics stores can their malls support.