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Commercial Real Estate Drifts Toward Disaster

Sept. 5, 2007 (EIRNS)—Declining prices in the multi-trillion- dollar US commercial real estate market, now threaten a new downward plunge in the current systemic breakdown, bringing down thousands of small banks and many pension funds — unless Congress quickly passes Lyndon LaRouche's Homeowners and Banks Protection Act.

Bloomberg reported signs of the breakdown Sept. 5. In July, 2007, investors bought the fewest commercial properties since August 2006, and apartment building acquisitions were down 50% in July, compared to June. The Tishman Speyer Properties-led group which had planned to complete a $13.5 billion buyout of Archstone-Smith Trust, a commercial property giant, in August, was forced to postpone that deal until October. Deals in the commercial real estate market are falling apart, as expected rates of return are revised downward. Large commercial property developer David Lichtenstein asserted, "people who can get out, are getting out."

Commercial real estate mortgages total $2.2 trillion, many bundled into mortgage-backed securities, like the residential mortgages. "Development loans," construction loans secured only by the land on which a developer plans to build, comprise some comparable large dollar figure.

One of our most vulnerable sectors is small U.S. banks — less than $1 billion in assets — which have gobbled up commercial real estate loans. The Federal Deposit Insurance Corporation reports that 37% of all small banks either: 1) are exposed to commercial real estate loans to the extent of 300% of their capital; or 2) are exposed to construction loans alone, to an extent exceeding their capital.

In addition, the Sept. 3 Pensions & Investment magazine reports that many pension funds have bought commercial properties, using 80 to 90% leverage. Many planned to hold the properties only a short time, and sell them at a substantial speculative profit, because the market value of buildings was rising. But now, with building values weakened, the pension funds are left holding properties that are difficult to move, while incurring significant debt service on them.