Commercial Properties Seek Federal Bailout Developers of office buildings, shopping centers and hotels say they are having trouble refinancing loans and want access to a $200 billion fund set up by the Fed to shore up consumer lending markets. It's not clear whether the Fed is offering any encouragement.
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Commercial Properties Seek Federal Bailout

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Commercial Properties Seek Federal Bailout

Commercial Properties Seek Federal Bailout

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ROBERT SIEGEL, host:

From NPR News this is All Things Considered. I'm Robert Siegel.

MICHELE NORRIS, host:

And I'm Michele Norris. There's yet another potential crisis looming for the struggling economy. It's in the commercial real estate market. That's the industry that owns office buildings, hospitals and hotels, among other things. Hundreds of billions of dollars worth of loans are coming due on those buildings, but the industry says it can't repay or even refinance most of those loans and that the government needs to intervene. NPR's Chris Arnold reports.

CHRIS ARNOLD: Officials with the Federal Reserve have been meeting with industry executives over the problem, which is basically this - the credit crisis has made it a lot harder to get a loan right now, whether you're a school teacher looking to buy a $20,000 car, or a real estate company looking to refinance a $20 million office building.

Mr. RICHARD COWDEN (Managing Editor, Real Estate Law and Industry Report): It's a train wreck for the commercial real estate market.

ARNOLD: Richard Cowden is managing director of the Real Estate Law and Industry Report. He says that these big real estate loans are different from home loans. They have to be fully paid off or refinanced much more quickly.

Mr. COWDEN: Their loans come due typically from every seven to 10 years.

ARNOLD: And with several trillion dollars in outstanding loans on all those office parks and shopping malls and hospitals, that's a lot of debt that has to get refinanced every year. Michael Grupe is a vice president with the National Association of Real Estate Investment Trusts.

Mr. MICHAEL GRUPE (Executive Vice President, Research and Investor Outreach, National Association of Real Estate Investment Trusts): We estimate that around $400 billion of commercial mortgages will mature in the next 12 months.

ARNOLD: Grupe says in 2007, about $200 billion of commercial loans got refinanced through what's called securitization - that's when mortgages get bundled up and sold off to investors as securities. So, that's a giant pipeline for funneling cash into the system. But in the first six months of this year, that flow of money slowed to a trickle and now…

Mr. GRUPE: In the second six months, it's zero. It's frozen.

ARNOLD: Well, so it's not like, OK, there's been a mild slowdown here. The pipe is frozen solid. There's no money coming out.

Mr. GRUPE: Yes. It's totally shut down. Yes. It is totally shut down.

ARNOLD: So, it's not just commercial buildings that might be on shaky footing financially. Grupe says even very good, profitable office buildings or hospitals or apartment buildings that should be able to get refinanced can't. So what would happen if hundreds of billions of dollars' worth of commercial real estate can't get refinanced when it comes due?

Mr .GRUPE: We don't want to find out what would happen.

ARNOLD: So, Grupe and others in the real estate industry have been meeting with officials at the Federal Reserve and asking the government for help.

Mr .GRUPE: We really need some sort of action that will help to restart the securities market.

ARNOLD: The government has already announced a $200 billion plan to try to restart the market for credit cards, car loans and other consumer debt. Basically, the government's providing guarantees to get investors to buy up these securities again. So Grupe says the commercial real estate industry wants that program expanded to include these commercial loans.

Mr .GRUPE: In our conversations with the Federal Reserve, I think it's fair to say that the senior staff indicated that they're open to a program like this. They recognize the problem.

ARNOLD: Some economists think the government should take action here. Mark Zandi heads up Moody's Economy.com.

Mr. MARK ZANDI: (Chief Economist and Co-Founder, Moody's Economy.com): This is the next big problem for the financial system and the broader economy. I mean, it began with residential mortgages, extended into consumer credit and now, the next shoe to fall would be commercial real estate.

ARNOLD: Zandi says the problem is that if all these big real estate loans can't get refinanced, that would mean more losses for the already staggering banks.

Mr. ZANDI: The banks and financial system broadly don't have enough capital as it is, and if they have to take big losses on their commercial real estate holdings and of course, that just undermines their capitalization even more and they can't extend credit to anybody.

ARNOLD: So, Zandi says this is one of the next areas we're likely to see the government try to intervene to stop the financial crisis from getting even worse. Zandi expects this to be the worst recession in 50 years, and so, he and other economists think the government should be doing all it can. Chris Arnold, NPR News.

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