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US Lawmakers Sound Alarm About Commercial Real Estate Market

By Jessica Holzer, Of DOW JONES NEWSWIRES

WASHINGTON -(Dow Jones)- U.S. lawmakers rang alarm bells about the troubled commercial real estate industry, which has been walloped by the credit crunch and an implosion of property values.

"The commercial real estate time bomb is ticking," Joint Economic Committee Chairman Rep. Carolyn Maloney, D-N.Y., said in opening remarks to a hearing before her panel Thursday.

U.S. Sen. Sam Brownback, R-Kansas, said he was distressed about the situation the industry is facing.

Banks have yanked back on lending to developers of shopping malls, apartment complexes, hotels and office parks. Meanwhile, the securitization market - a key source of funding for the commercial real estate industry - has been in a deep freeze since last year.

The situation is fueling concerns that property developers won't be able to refinance roughly $400 billion in commercial real estate debt coming due this year. Property values have plunged about 24% since their peak in 2007, further hampering developers' ability to obtain refinancings or loan extensions.

General Growth Properties, one of the largest U.S. shopping mall owners, filed for bankruptcy protection along with 158 of its properties in April, citing lack of financing.

A wave of defaults of commercial real estate loans would deal a blow to the already weakened banking industry. The U.S. commercial real estate market is roughly $6.7 trillion in size and is underpinned by about $3.5 trillion of debt.

The Federal Reserve has taken steps to get lending flowing to the industry. On June 16, it announced it would accept as collateral new issuance of commercial mortgage-backed securities as part of its emergency program to thaw the securitization market. As early as next week, the Fed is expected to extend that to existing, or "legacy", CMBS already held by investors.

The commercial real estate industry believes these steps will help unleash lending to property owners and developers by spurring more investor appetite for CMBS. To the extent that CMBS investors are able to buy and sell the securities again, spreads will tighten, the Fed argues. That will allow financial institutions that make loans backing the CMBS to free up their balance sheets and make new loans to the industry or refinance existing debt.

-By Jessica Holzer, Dow Jones Newswires; 202-862-9228; jessica.holzer@ dowjones.com

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  07-09-091132ET
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