Cracks show up in US Real Estate

Residual debt from 2007 is amplifying the cracks in the United States real estate market. Landlords reliant on borrowed cash are finding it harder to source new loans to pay off older ones. These leads to greater delinquencies. Add the impending $90 billion wave of incoming maturing commercial mortgages and you have a dire picture of the immediate future. The money is a leftover debt from the time of lending boom in 2007.

Scary scenario

Lenders have become more discriminatory about the buildings they want to fund. Their list of concerns include properties saddled with overheated prices. The range of such properties include hotels, office buildings and shopping malls. The office buildings particularly fetch record values in cities like New York. Banks also suffer from a rise in interest rates coupled with regulatory constraints. All these factors add up to one result: borrowers will find it much harder to refinance when the time for that comes.

In 2007, a record $250 million of mortgage backed commercial securities were snapped up by institutional investors. Relaxed lending standards helped landlords all over the United States to pile buildings with huge amounts of debt. According to a number of Wall Street analysts, there could be a bloodbath during the next 10 years, with commercial mortgages worth about $700 million all set to mature during the period.

Unequal recovery and delinquency rates

Commercial mortgages packaged into bonds have a higher delinquency rate. The latter can go up by even 2.4 percentage points. This can even reach 5.75 within 2017. If it does, it will turn back many years of declines as the property owners continue to struggle with their maturing loans. Bondholders may suffer losses in this regard.

An unequal recovery of the real estate sector will result in both winners and losers. It will be completed as the last residues of the pre-crisis debt gets flushed out of the system. The value difference between properties are stark. Even though values of skyscrapers have increased by a massive 50 percent on top of 2008 peak, the prices attached to suburban office buildings continue to languish below 4.8 percent. Those borrowers who hold commercial real estate located outside central parts of the city have started to suffer as they despair for a newer round of financing. For owners of property, credit has again become scarce. Costs of borrowing have jumped with the electoral victory of Donald J. Trump.

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