January 5, 2009

Commercial properties face bursting bubble

Rising vacancy rates in U.S. office buildings are pointing to a possibility that a commercial real estate bubble could burst, industry observes said.

Vacancy rates have reached 10 percent and are rising quickly in major U.S. cities, The New York Times reported Monday.

The Real Estate Roundtable, a lobbying group in Washington, has asked Treasury Secretary Henry Paulson Jr. to include commercial real estate in a new $200 billion package intended to spark new lending, the Times said.

Mortgage research firm Trepp reported 60 percent of commercial properties loans have been bundled into complex securities, which puts some of the nation's largest banks, including Bank of America and Morgan Stanley in a risky position.

Similar to the housing crisis, the banks stand to face huge write downs. Some commercial property owners are stuck with mortgages worth more than the buildings they own and a financial market reluctant to refinance loans while their revenues decline with rising vacancies, the Times said.

A defaulted loan is by itself ... not significant, said Real Estate Roundtable Chief Executive Officer Jeffrey DeBoer. But, the cumulative effect will put tremendous stress on the financial sector, he said.