The commercial real estate (“CRE”) loan market is floundering and is expected to increasingly experience high levels of losses over the next several years. The question on interested minds is whether the fall-out from CRE loan failures will mimic the devastation caused by the crisis in the residential mortgage loan market. Recently, the Congressional Oversight Panel, established pursuant to the Emergency Economic Stabilization Act of 2008, issued a bleak, if not frightening, report on the implications these anticipated losses in the CRE market and repercussions to the greater economy. The report, entitled “Commercial Real Estate Losses and the Risk to Financial Stability” (the “Report”), cautions that we could soon face a wave of CRE loan failures as approximately $1.4 trillion in CRE loans become due sometime between 2010 and 2014 causing our already weakened economy to suffer prolonged negative effects. The Panel believes the impact of a fallout from the CRE loan industry will be far-reaching, affecting not only those in the commercial real estate industry, but also small business owners, communities and the general public.
Notwithstanding the grim picture painted by the Report, there are some economists who argue that while the forecast from the fallout from the CRE loan market will be cloudy, it won’t be “the perfect storm” envisioned by the Report. Retail Traffic Magazine, for example, a leading authority on retail real estate trends, finds that “according to many real estate economists,…[the] fear [that fallout from the commercial real estate loan market will do as much damage as that done from the residential real estate loan market fallout] is largely misplaced. Commercial real estate debt will likely stall the recovery in the credit markets, they note, but because of a combination of factors, including the limited impact of commercial real estate loans on the overall economy, it won’t bring about the same wave of distress as the housing downturn did." Watch for upcoming posts which provide a snapshot of each of these positions.