"Reviving the Economy: Real Estate"-Matthew Anderson of Foresight Analytics on Commercial Real Estate Failures
Thursday, April 16, 2009SUSIE GHARIB: Another sign of weakness in commercial real estate today. General Growth Properties filed for bankruptcy, the largest real estate failure in U.S. history. The Chicago-based developer owns 200 U.S. malls in 44 states. It will continue to operate all of those shopping centers during the bankruptcy process. General Growth is saddled with $27 billion in debt and couldn't rework the terms of those loans with lenders. So what are the implications of the General Growth bankruptcy for the commercial real estate market and the economy? As we continue our series "Reviving the Economy: Real Estate," we are joined now by Matthew Anderson, partner in the real estate research firm, Foresight Analytics. Hi, Matt.
MATTHEW ANDERSON, PARTNER, FORESIGHT ANALYTICS: Hi, Susie.
GHARIB: So do you think that this General Growth bankruptcy is the beginning of bigger problems in the commercial real estate market?
ANDERSON: Well, it wasn't exactly unexpected. It had been widely discussed for awhile, but I do think it sends -- puts a chill on the market and has probably raised anxieties about the whole issue of liquidity within the commercial real estate market where you have a lot of loans coming due from prior, more (INAUDIBLE) evaluations from prior years and easier lending standards. They really wouldn't qualify under those same terms today.
GHARIB: Are developers defaulting on their loans?
ANDERSON: Well, developers are. You have among the different loan types out there in commercial real estate, construction lending - both for -- mainly for residential but also for commercial real estate. The defaults there have risen and as of the fourth quarter, the delinquency rate on construction loans was 11.4 percent. That compares to mortgage -- the commercial mortgage market where delinquency rates were more like 2.7 percent.
GHARIB: Do you see that these problems in commercial real estate could have more of an impact on the economy? Everybody's been kind of worried about the other shoe to drop. Is this the other shoe?
ANDERSON: Well, we think it is. It's not exactly clear whether defaults will rise to the levels that we and other people fear. There's a lot of liquidity trying to be -- or an attempt to pump liquidity into the market, especially from the government's side and some different government programs to enhance liquidity in the market, but certainly, we're worried about that. And you've got commercial real estate lows hitting at a time when banks, for example, are already weakened by the residential problems.
GHARIB: What is the exposure that U.S. banks have to commercial real estate lending?
ANDERSON: Well in total, commercial real estate loans on banks' books amount to about $1.8 trillion. That's a big figure, um, but -- and that's a little over half of the entire commercial mortgage market or commercial real estate debt market of $3.5 trillion. To put it in some relative terms the entire U.S. residential mortgage market is $11 trillion. We're at about 1/3 the size, but we're experiencing a lot of the same issues that hit the residential market where, again, easy money from prior years at higher evaluations really is coming back to bite us now.
GHARIB: I'm sure you heard that today the Federal Reserve said that it would -- it could make changes to its TALP program, its Term Asset Lending Program to provide loans to investors to buy commercial mortgage-backed securities. Would this help the industry?
ANDERSON: It helps out. It provides sort of, in our view a marginal boost. Obviously, the direct impact is that it'll help boost the prices for the highest-rated CMBS securities or the AAA-rated CMBS securities. It doesn't really have a great impact necessarily on the lower-rated -- even the other investment-grade tranches like BBB on AA. It doesn't necessarily help out there. And it's hard to see what the direct impact is on lending. I think ultimately, the goal is to revitalize the CMBS market which at its peak was providing about 40 percent of the net --
GHARIB: Matt, I hate to jump in. I hate to interrupt you. I'm so sorry but we're just run short on time. Interesting question that we'll have to pursue with you at another time. ANDERSON: Great, thank you Susie.
GHARIB: Thank you. My guest tonight, Matthew Anderson of Foresight Analytics.
