A looming crisis in commercial real estate looks like the next big headache for recession-weary Americans.

Insiders plead for help, warning Washington of crash worse than 1990s slump that could saddle banks with new wave of bad loans

Real estate insiders, experts and regulators warned a U.S. congressional committee Thursday that commercial real estate is headed for a crash that could eclipse even the devastating slump of the early 1990s, saddling already hobbled banks with a new wave of bad loans.

The picture isn’t pretty. Property values have already collapsed more than home prices, vacancy rates are soaring as the recession wears on and once-buoyant loan and credit markets have virtually dried up. Now, even the owners of good properties are facing foreclosure.

“Commercial real estate is the next shoe to drop,” James Helsel, a Pennsylvania realtor and treasurer of the U.S. National Association of Realtors, told the joint economic committee.

The hearing comes as the Obama administration is investigating what to do about emerging risks facing the U.S. economy – a process ominously dubbed “Plan C” to signify a last line of defence. And the plight of commercial real estate is near the top of its concerns.

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“ The severity of the current downturn is likely to exceed, possibly by a large magnitude, [the crash] of the early 1990s. ”— Deutsche Bank real estate analyst Richard Parkus

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The dilemma for the U.S. Federal Reserve and the Treasury Department is that they do not want to expose the banking system to any new risks. But unless banks resume steady lending to commercial real estate, the industry says the job market and local tax revenues could take another big hit. There aren’t any easy answers.

But industry officials told the committee that better tax treatment of foreign investors would go a long way to help.

They also called for a degree of mortgage relief from banks, and improved government efforts to revive the lifeless mortgage-backed securities market.

“We need to turn the page and get the market working again,” said Jeffrey DeBoer, president and chief executive of the Real Estate Roundtable, which represents large developers and property managers.

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Barrie McKenna

Source: The Globe And Mail – Canada