Commercial Real Estate Loans

By ALAN ZIBEL
The Associated Press
March 10, 2008, 6:50PM ET

Read the article here or at Business Week

Trade group says commercial real estate loans are safe.

Washington

Investments backed by commercial real estate loans have avoided the problems socking the home loan market, an industry group said Monday.

The Mortgage Bankers Association's 2007 statistics show that investors in commercial real estate loans -- which finance purchases of properties like apartments, office buildings and malls -- have escaped the kind of defaults that have soared among home loans over the past year. The group expressed hope that the statistics regarding commercial real estate loans should ease worries about the industry, which has seen investment dry up in recent months due to the global credit crunch.

Steve Graves, managing director and chief operating officer of Principal Real Estate Investors in Des Moines, Iowa and chairman of the trade group's commercial board, said commercial real estate loans remain a sound investment despite worries about the economy.

"A lot of what you're seeing today is really fear of what might happen rather than what is happening," he said.

Delinquencies on commercial real estate loans packaged into investments known as commercial mortgage-backed securities have dropped from 1.7 percent at the end of 2003 to 0.4 percent at the end of 2007, the report said. The trade group's report noted that among major investors in commercial real estate loans, only banks and thrifts saw delinquency rates increase last year, growing to 0.8 percent from 0.56 percent in late 2006.

The report also said Fannie Mae, the government-sponsored mortgage finance company saw its delinquency rates for commercial real estate loans such as apartment buildings and other multifamily properties, remain even at 0.08 percent, while its government-sponsored sibling, Freddie Mac saw its delinquency rate for those properties drop to 0.02 percent.

Still, the commercial property market, and thus commercial real estate loans, aren't immune from real estate turbulence. Sales of office buildings worth more than $5 million fell to $4.3 billion in February, down 76 percent from $20.1 million in the same month a year earlier, according to research firm Real Capital Analytics. The market for commercial mortgage securities "remains frozen," and federal regulators are more closely scrutinizing all kinds of commercial real estate loans, Real Capital said.

Credit rating agency Moody's Investors Service said last month the performance of mortgage-backed securities relating to commercial real estate loans could be harmed this year by a weakening economy and uneasy financial markets. Securities volume in 2008 could fall below $100 billion from the $230 billion recorded last year and tighter lending standards could cause commercial real estate prices to drop between 12 percent and 17 percent, Moody's said, thus negatively effecting commercial real estate loans.

The commercial real estate loans examined in the Mortgage Bankers Association report don't include construction related commercial real estate loans, which are made to build properties and buy loans. Those commercial real estate loans, especially those tied to residential real estate, have seen surging defaults in recent months.

Construction and development loans are loans made to builders for properties such as strip malls, office buildings and residential developments. The percentage of those loans that are 90 or more days overdue rose to nearly 3.2 percent at the end of 2007, up from less than 1 percent a year earlier, and is now at levels not seen since the early 1990s, according to the Federal Deposit Insurance Corp.

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