12:00 AM CDT on Friday, September 11, 2009
By STEVE BROWN / The Dallas Morning News
stevebrown@dallasnews.com
The commercial real estate market is bracing for its worst shakeout in more than two decades, exacerbated by the ongoing credit crunch. Most commercial property mortgages made within the last few years are headed for default, warns Ethan Penner, one of the country's top real estate financiers. "For anything originated after 2005, the chances of those loans going into default are very high," said Penner, president of CBRE Capital Partners. "A large majority of the loans originated in this period will ultimately go into default." Penner spoke to real estate executives in Dallas on Wednesday night. He is credited as being one of the originators of the commercial mortgage-backed security industry in the 1990s when he worked at Nomura Capital. Before that, he was a principal with Wall Street firm Morgan Stanley. He joined Los Angeles-based CB Richard Ellis in 2008. Penner predicts that more than $1 trillion in values will be lost over the next few years for commercial properties including offices, warehouses, shopping centers and hotels. "We are going to see very high real losses," he said. "So far, the loss average has been 40 percent of what has been foreclosed on in the last year." And most industry analysts say that the commercial property sector's problems are just beginning. "We still have room to go – there's no reason to be optimistic," Penner said. Battered by the recession and cut off from most debt sources, commercial building landlords are getting squeezed. While there is not as much overbuilding in Dallas and other markets as in previous downturns, the constraints on new capital are worse. And commercial property defaults here are growing – up 12 percent this year with more than $500 million in loans foreclosed so far. "The last time we all saw this was in the early 1990s in what we like to refer to as the savings and loan crises," Penner said. "Now, it's arguably a much more severe and scary time than that." Penner estimates that almost $2 trillion in commercial property debt will come due in the next four years. "Who is going to refinance all these loans?" he asked. "Yesterday's lenders are either completely gone or highly impaired." He estimates that about 50 percent of current commercial property loans are held by banks and another 23 percent are in commercial mortgage-backed securities. Banks with problem real estate debt are being pressured by government regulators to foreclose on the properties and sell them off, Penner said. "I believe over the next few years we will see a period of distressed property selling that will rival the Resolution Trust Corp." sales during the savings and loan industry crash of the late 1980s and early '90s, he said. "The pressure is building – I'm starting to see it even in the last two weeks." And as in the S&L property sell-off, investors are waiting to take advantage of bargain real estate. "Low values will inspire new capital to come in and by loans and assets," Penner said.