The (Re)Financing Gap

Over the next several years the US commercial real estate market will confront approximately $1.4 trillion in de-levering loans.  Many of these were issued in “peak value”, “peak LTV” years of 2005-2007 (5-7 year loan maturities will come due in 2010-2014, and 10 year loans will come due in 2015-2017).

While de-levering can be a painful process, for top markets and assets, the pain will be manageable; there are abundant debt and capital sources competing for deals in the top metropolitan areas on stable institutional quality assets.  Additionally, borrowing costs are quite low given current low interest rate levels.

Outside of these top metropolitan areas, the availability of capital may prove to be quite limited.  In stronger economic times, community banks and CMBS issuers were reliable lenders in secondary and tertiary markets, however current bank weakness exacerbate the re-financing gap in some markets.  Additionally, slow CMBS issuance isn’t providing sufficient relief today, though activity is starting to increase.

 Through October 1, 2010 alone, 129 banks were taken back by the FDIC (with 10% of all banks on the “problem bank” list).  These failed banks represent an uptick over last year’s bank closings, which on a year to date basis were 98.  For a bit of historical perspective, 2010 is on it’s way to becoming the highest number of bank failings since 1991 when 144 banks closed (during the Savings and Loan crisis).

The state of Florida represents 20% of the FDIC’s 2010 bank failure list with 20% of all banks (25 bank failures), followed by Georgia and Illinois (14 and 15 bank failures respectively) and Washington state and California each have 10 bank failures.

A major contributing factor to the increase in bank failings is problem commercial real estate loans.  As a result we expect to see more distressed loans brought to market under the weight of these bank closings. This also begs the question, as the re-financing gap problem approaches, will the credit markets be able to address secondary and tertiary market demand with a severely reduced CMBS market and community

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