The recent bankruptcy of Capmark Financial Group, Inc., one of our country's largest commercial real estate lenders, may just introduce the rest of the country to the problem Washington, the real estate industry, Wall Street and all other type of financial professional has nicknamed, "the other shoe."
For a number of months, owners of commercial real estate have been scrambling to prepare for that "shoe" to drop. That is, in only a matter of months, office, industrial and multi-family (apartment) property mortgages are going to come due. And just like in the consumer banking world, the credit isn't there to keep landlords afloat.
According to an expert with Deutsche Bank AG, between now and 2013, more than $2 trillion will need to be re-financed. Commercial real estate mortgages typically have shorter terms and are called due within five or ten years. At that point, it is up to the owner to pay up or find new financing.
Essentially, commercial landlords did the same thing so many homeowners did: they jumped at aggressive mortgages and then used the property's equity for additional loans and lines of credit. It should also be noted that the lending industry also played the same game with landlords as they did with home buyers. Countless landlords were encouraged to take out bigger loans to finance renovation and tenant-required fit-up projects on top of monthly mortgage payments.
The problem with an office property going under is the immediate effect it has on the local economy. When the value of commercial property drops, the business appeal of an area falls along with it. Businesses, like homeowners, are driven by location. Office parks and high-end business districts carry the same appeal as a gated, affluent residential community does to a person seeking a new home.
Unemployment is also making things worse. If people aren't working, then companies need less office, manufacturing and lab space. That means that landlords can't fill their buildings and thus, can't make enough in rent to pay their mortgage. Additionally, many companies are subleasing excess space at very steep discounts, which competes directly with buildings that have first generation, or new, space on the market.
For months, government legislators have been negotiating with industry leaders about how to best leverage TARP dollars, finance bonds and leverage government money to keep the property market from tanking. So far, nothing seems to be working.
Capmark's issues are a perfect case study for the mortgage problems behind this recession. Basically, the company sold the majority of its loans to the secondary market, which froze completely upon the recession's conception. As companies fell apart and stopped leasing space or couldn't pay anymore, commercial property value plummeted. Capmark was then left holding billions in debt that it could no longer handle.
Upon filing, the company listed $20.1 billion in assets and $21 billion in debt.
Many industry professionals view the Capmark bankruptcy as merely the beginning of what lies ahead for the commercial real estate sector. As of right now, business are not growing or relocating. Thus, with little demand for commercial space, buildings sit empty or inactive and thus, lose value. And therein lies another major problem. Even if capital was available to refinance all the mortgages, many properties simply will not be worth enough to justify a new mortgage.
Like we've said a number of times, despite some positive signs of economic recovery, there are far too many messes out there still needing to be cleaned up. Boy, did we do a number on this economy or what?