Declining Property Values Hinder Refinancing Efforts

Refinancing $250 billion in loans that are coming due this year has commercial real estate experts worried. The percentage of foreclosed commercial mortgages held by banks at the end of the second quarter more than doubled to roughly 4.3 percent, or $7 billion total, compared with a year earlier, according to recent industry estimates. That figure is projected to reach 4.6 percent by the end of 2009.

Janet Yellen, president of the Federal Reserve Bank of San Francisco, says that the biggest concern now is with maturing loans on depreciated commercial properties. Yellen points out that in many cases, borrowers seeking to refinance will be expected to provide additional equity and to have underwriting and pricing adjusted to reflect current market conditions. According to Yellen, the economic forces hammering commercial property are unlikely to reverse anytime soon.

As valuations continue to decline and debt financing remains scarce, borrowers are feeling the pinch. Valuations are reaping the most havoc on maturing loans. Since peaking in October 2007, asset values have plummeted 29.5 percent year-to-date through April, according to the Moody’s/REAL Commercial Property Price Index.