If the residential real estate market is having problems, so is the commercial real estate market – perhaps even more so. Commercial real estate properties – like apartments, shopping malls, hotels, and office buildings – were at a peak until 2007 but devalued 36% in the last two years. The real estate market has incurred debts in the past years and may still incur more debts in the coming years.
The real estate market may still be valued at $6.7 trillion but its debt amounts to $3.5 trillion. Half of the market’s debt is held by banks, a quarter by financial institutions, and the last quarter by other investors. The real estate market came staggering because of low occupancy and depressed property values.
In mid-2009, almost 9% of the commercial real estate loans offered by banks were deviant from what is usual: levels were double than what they were from a year ago. Banks faced problems, especially in lending for construction and development.
Life is not without risks, though, and there are still some that gamble – and failed. In January 2010, owners of apartment complexes in Stuyvesant Town and Peter Cooper Village in Manhattan defaulted by sampling turning in the keys. Lenders, which got a portion of the investment from California Pension funds (this includes the California Public Employees Retirement system and California State Teachers Retirement System), spent nearly $4.5 billion in the complexes; the complexes are now just worth less than $1.9 billion.
Commercial real estate differ largely from residential in that the latter’s mortgages have the backing of the federal government since they are mostly handled by the top ten banks. As for commercial real estate mortgages, it is harder to control them as they are held by middle and small size local and regional banks. This is a structural fault that just might bring forth another economic crisis, as it is predicted that 55% of the commercial real mortgages due by 2014 are going underwater.
Federal Deposit Insurance Corporation Chief Sheila Bait warns of a three-year problem on the mortgage crisis. This might also cause small and regional bank failures, she says. But the Treasury Secretary digresses.
The Treasury Secretary assures that the economy is currently on a rebound. There is an improved Gross Domestic Product rate, bank stabilization efforts, and increased private demand that will avoid a crash by the commercial real estate market.