Saturday, April 3, 2010

What Happened to the Commercial Real Estate Collapse Everyone Expected?

Posted Apr 01, 2010 03:30pm EDT by Heesun Wee in Investing, Recession, Banking, Housing

There's a growing suspicion among investors that the gulf between the soaring stock market and sideways action in housing can't go on much longer. Housing expert, notably Robert Shiller of Yale University, a Tech Ticker guest, is warning about the possibility of a double-dip in housing.

But another potential real-estate crisis is looming -- this time in the commercial sector. About half of all commercial mortgages will be underwater by the end of 2010, posing a "very serious problem" for the economy over the next three years, Elizabeth Warren, chairwoman of the TARP Congressional Oversight Panel, told CNBC this week.

So why hasn't commercial real estate collapsed yet?

In part the sector has been able to access the unsecured bond markets, says our guest Jeung Hyun, portfolio manager for Adelante Capital, which has over $2 billion of domestic REITs under management. "Clearly there's lending still available for these companies that's allowed them to survive," Hyun tells Aaron and Henry in the accompanying clip.

Another trend that's helping commercial real estate -- few, new office space buildings. "To a certain extent people are assuming that the recovery is going to be sharper than normal" because of the lower inventory, Hyun says.

Are banks extending credit & pretending?

Hold on. Clearly there are whispers and anecdotes of excess inventory and even "shadow" inventory. In other words, banks that are extending credit and hoping all will be OK by the time the loans come due.

Hyun argues there's clarity in details. More stand-alone retailers have been built than regional malls. And without a doubt, there's concern about the wave of secured mortgages coming due. Plus, the Fed this week ended its program of buying mortgage-backed and agency securities. Can housing stand on its own two feet?

But Hyun argues not all mortgages will be problematic. Some were inked -- well before the height of the housing bubble in 2007-08 -- when underwriting standards were still high.

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