Transcripts

The Credit Crunch Is Putting The Squeeze on Commercial Real Estate

PAUL KANGAS: The Federal Reserve said today that credit got tighter in the past three months. Banks are clamping down on credit cards, mortgages and home equity loans. Commercial real estate loans are also harder to get despite that market doing better than residential. As Stephanie Dhue reports, the double whammy of a slowing economy and tight credit is putting pressure on commercial real estate.

STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Real estate developer Steven Grigg operates in what is arguably one of the best commercial real estate markets in the country. But even here in the nation's capital, the credit crunch is putting a stress on business.

STEVEN GRIGG, DEVELOPER, REPUBLIC PROPERTIES: We are not immune from the general problems of raising capital and that is probably the toughest challenge right now. The confidence, not only that the capital that you raise to develop something will be available, but what is going to happen down the road in terms of availability of permanent financing.

DHUE: The market for commercial mortgage backed securities, or CMBS, is drying up. In the first half of 2007, $147 billion worth of commercial mortgage backed securities were brought to market and successfully sold. So far this year, only $12 billion worth of the deals have been completed -- a more than 90 percent drop -- and there are no CMBS deals on the market now. That tight credit is making it difficult to refinance commercial real estate loans, which typically have five-, seven- or 10-year maturities. Ken Lore heads the corporate real estate group for the Bingham, McCutchen law firm. He says the credit crunch is making it difficult for owners of even fully-leased properties.

KEN LORE, PARTNER, BINGHAM MCCUTCHEN: If the bank comes and says I'm not going to re-up your loans or I'll only re-up your loan if you put down another 20 or 30 percent equity, which people don't have, then that could end up in a very, very troublesome situation.

DHUE: The situation is becoming more difficult as vacancy rates for retail, office and warehouse space rise. Those rates have increased 1 percent since the beginning of the year and now stand at 14 percent. Robert Bach, chief economist for Grub and Ellis, predicts the vacancy rate may climb to 16 percent and property values could fall 15 to 20 percent over the next 18 months, bad, but not that bad.

ROBERT BACH, CHIEF ECONOMIST, GRUBB & ELLIS: I think it will -- compared with residential it will be much less pain. It's not that commercial real estate is the next shoe to drop after residential. It's more a case of adding insult to injury.

DHUE: Just how much insult will be added will depend largely on the economy, consumer spending and just how much demand there will be for commercial space. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.