Commercial Real Estate Crash Looming,

Says Fed’s Yellen

By AUSTIN KILGORE
July 29, 2009 9:55 AM CST

As the industry looks for signs the housing sector is beginning to stabilize, the threat of a crash in the commercial mortgage market grows, according to San Francisco Federal Reserve president Janet Yellen.

Speaking this week at a bankers convention in Idaho, Yellen said while there are signs that the economic growth is beginning to return — house price declines are abating, consumer spending is stabilizing and new unemployment is lessening — the recovery will be painfully slow and the Fed believes commercial real estate is the economy’s next vulnerable spot.

The problem, Yellen said, is maturing loans for commercial properties that lost significant value.

“Borrowers seeking to refinance will be expected to provide additional equity and to have underwriting and pricing adjusted to reflect current market conditions,” Yellen said. “In some cases, borrowers won’t have the resources to refinance loans.”

Yellen urged the community bankers at the conference to be proactive in preparing for a potential downturn, which could include, she said, property value drops as high as 30% to 40%. Namely, she told the audience to address emerging credit problems and commission new appraisals, but also encouraged them to continue lending to creditworthy borrowers.

The remarks fall in line with a number of credit ratings reports that warn commercial real estate is set to take a tumble.