Commercial Real Estate Threatens Economic Recovery

Feb. 11, 2010 — -- Commercial real estate losses -- empty office buildings, shops and hotels whose owners cannot make mortgage payments -- pose a serious threat to the stability of the country's banks and the ongoing economic recovery, a watchdog group warns in a new report out Thursday.

"A significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American," says the Congressional Oversight Panel, which was created by Congress in 2008 to "review the current state of financial markets and the regulatory system."

The panel's report says, "Empty office complexes, hotels, and retail stores could lead directly to lost jobs.

"Foreclosures on apartment complexes could push families out of their residences, even if they had never missed a rent payment.

"Banks that suffer or are afraid of suffering commercial mortgage losses could grow even more reluctant to lend, which could in turn further reduce access to credit for more businesses and families and accelerate a negative economic cycle."

With about $1.4 trillion in commercial real estate loans reaching the end of their terms between now and 2014 -- and nearly half already "under water" -- the losses could be devastating, the panel predicts. Hundreds of community and mid-sized banks could fail, adding to the hundreds that have already collapsed during the recession. Potential loan losses projected for 2011 and beyond could range as high as $300 billion, the report says.

'There are No Easy Solutions'

To prevent a meltdown, the panel, chaired by Prof. Elizabeth Warren of Harvard Law School, calls on the Treasury Department and bank supervisors to address the problem "forthrightly and transparently," but at the same time they acknowledge that "there are no easy solutions."

Commercial Real Estate Meltdown Could Threaten Recovery

"The coming trouble in commercial real estate could pose painful problems for the communities, small businesses, and American families already struggling to make ends meet in today's exceptionally difficult economy," the panel says.

"It is difficult to predict either the number of foreclosures to come or who will be most immediately affected," it says. "In the worst case scenario, hundreds more community and mid-sized banks could face insolvency. Because these banks play a critical role in financing the small businesses that could help the American economy create new jobs, their widespread failure could disrupt local communities, undermine the economic recovery, and extend an already painful recession."

In the report, the panel also analyzes Treasury's sales of stock warrants received from the $700 billion TARP bailout. The watchdog found that total receipts from the sales and auctions of these warrants will total $9.3 billion.