The lesson that was learned (or re-learned) in the commercial real estate (CRE) crash of the
early 1990s was that problems associated with massive over-supply can plague the industry
for many years. The lesson that will be learned in the current crash (with CRE prices declining
by 40-50%, or more, from their peaks, the term crash is, once again, appropriate) is that
problems emanating from the financing side—in particular, a massive deterioration in
underwriting standards and a concurrent rise of excessive leverage—can lead to problems of
a similar (or greater) magnitude, even without supply problems.
While most attention in commercial real estate today is focused on the dramatic ...view middle of the document...
g. lower leverage, higher cap rates and credit spreads), we estimate that
commercial real estate prices have declined 25-30% from their 2007 peak. On top of this, the
impact of the worst economic recession in decades on property cash flows will likely push
them down additional 15-20% over and above the declines due to financing market changes.
We argue in this report that, as a result, there are hundreds of billions of dollars, perhaps
more than a trillion dollars, of commercial mortgages scheduled to mature over the next
decade that are unlikely to qualify for refinancing without substantial equity infusions from the
There are, in fact, two very different sources of refinancing problems, both of which are
currently at play to varying degrees. The first source reflects the fact that most credit markets
are currently either shut or operating at dramatically reduced levels. The problem here is not
that maturing loans do not qualify for refinancing, but rather scarcity of credit makes it
difficult for all loans to find refinancing, even those that would normally qualify under the
new, tighter underwriting standards. Thus, in the current environment, the percentage of
maturing loans that are able to refinance has been declining significantly since late 2008,
despite the fact that the great majority of maturing loans is from the 1999 and 2000 vintages,
have experienced enormous price appreciation and easily qualify for refinancing. As credit
markets begin to heal, this source of refinancing problems will diminish.
The second source of refinancing problems, as previously noted, relates to the fact that a
vast swath of the commercial mortgages originated during the bubble years (2005-2007) will
not qualify for...