Commercial real estate's crisis point approaching?

$171 billion in loans coming due this year

2:00 a.m. February 19, 2009

With credit markets still shaky, about $171 billion in loans backed by offices, shopping centers, hotels and other commercial buildings are coming due this year.

Experts increasingly wonder whether there's enough credit capacity in the system to refinance them.

Yesterday, at a conference sponsored by the Burnham-Moores Center for Real Estate at the University of San Diego, bankers and real estate experts tried to tackle the crucial questions facing the market.

Two of them were: When will the credit freeze thaw, and what can commercial landlords expect when dealing with lenders?

The overall message was that it's too soon to know. Too much uncertainty remains over the direction of the economy and federal efforts to shore it up.

For months, experts have been saying commercial buildings will be the next shoe to drop in a real estate-led downturn that began with toxic subprime home loans and has spread to every sector of the economy.

One reason for concern is that the market for commercial-mortgage-backed securities – bondlike investments backed by bundled commercial mortgages – has all but dried up. Such securities accounted for about half of commercial real estate loans during the boom years of 2006 and 2007.

If landlords can't refinance, it could lead to distress sales as they're forced to get rid of their buildings or face foreclosure – further driving down values of real estate assets – many of which are secured by mortgages held by banks.

“It's hard to find real estate financing anywhere in the world right now, with the exception of China,” said Gayle Starr, senior vice president at AMB Property Corp. of San Francisco. “The vanilla deals are all that's getting done in this environment.”