There’s an organization with a floor in the same building as CAP/AF called the “Institute for International Finance” and I sometimes wonder what it is they do. According to Gillian Tett they release alarming reports about commercial real estate. She starts with the observation that there’s been a lot of “extend and pretend” in the CRE world and continues:
[L]ook at some numbers compiled by the Institute of International Finance, the Washington-based banking lobby group. The IIF calculates that in March 2008, there was about $25bn worth of pre-crisis investment grade commercial real estate in distress. By March this year, however, that number had exploded to $375bn (and has probably swelled since).
Thus far, the banks have “dealt with potential delinquency problems in part by extending loans until 2011-13”, the IIF notes. Or, in layman’s terms, they have swept it under the carpet. But while this avoided defaults, the IIF reckons that about $1,400bn of CRE loans must be refinanced before 2014. Alarmingly, “nearly half of these are at present ‘underwater’, ie have mortgages in excess of the current value of the property”, it adds.
What’s more, while homeowners have been subjected to major moral suasion campaigns to get them to avoid strategic defaults, commercial property is owned by rich businessmen who’ll be expected to act like rich businessmen and try to maximize profits. The big losers here are likely to be European banks, as well as America’s gigantic “small banks” sector. Of course if we get adequate action to try to push growth back up we may be able to mitigate some of this.