CRE Markets Yet to Hit Bottom, Analyst Tells Congressional Panel

Appearing before the Congressional Joint Economic Committee (JEC) on July 9, Richard Parkus, head of commercial mortgage-backed securities and asset-backed securities for Deutsche Bank, said that despite the substantial losses investors have incurred in the CMBS market during the past two years as a result of the defaults of the loans underlying the securities, still more pain lies ahead.
On the whole, Parkus projected total CMBS losses to reach between 9 percent and 12 percent of the outstanding loan universe, or as much as $90 billion. Meanwhile, banks could lose as much as $150 billion on their commercial real estate loan portfolios, according to Parkus.
Parkus testified at the JEC hearing along with Jeffrey DeBoer, president and CEO of the Real Estate Roundtable; Jon Greenlee, associate director, Division of Banking Supervision and Regulation, Federal Reserve Board of Governors; and James Helsel, treasurer for the National Association of Realtors.
The panelists all stressed the need for further action to stimulate the CMBS sector.
"I expect that over the coming decade the amount of capital from traditional sources committed to financing commercial real estate will decline significantly," Parkus said. "It is absolutely critical that a revitalized CMBS market be able to step in and fill the void. The CMBS market worked effectively and efficiently for well over a decade and, with the right changes, is capable of playing a vital role again in the future."
The panelists also noted the threat posed by the approaching wave of debt maturities on commercial mortgages, as feasible refinancing options have disappeared. With a combined estimate of $700 billion in debt expected to mature in 2009 and 2010, "the commercial real estate time bomb is ticking," said Rep. Carolyn Maloney (D-N.Y.), chair of the JEC.
"If mortgages are unable to refinance or otherwise pay their large balloon payments, we could expect to see the default rate soar," Maloney said.
Parkus projected that up to 65 percent of commercial real estate loans that make it to maturity will be unable to find refinancing options. Greenlee maintained that the economic recession also has exerted pressure on fundamentals, such as rents and vacancy rates.