More Liquidity Needed to Avoid Crisis in Commercial Real Estate

A severe lack of credit threatens commercial real estate and poses significant risks for the whole economy, according to a National Association of Realtors® work group.

Organized by NAR’s Realtors® Commercial Alliance, the Commercial Economic Stimulus Work Group has developed a plan to address high-priority issues like lack of credit to avoid further losses in the commercial real estate markets and identify strategies in alignment with other real estate stimulus activities as a part of the national economic recovery plan.

“Most lenders have withdrawn from the market and there is no secondary market for commercial mortgages,” said NAR President Charles McMillan, a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth. “If lenders cannot meet the growing demand for credit to refinance performing commercial real estate loans which are due to mature soon, a wave of defaults could worsen the current credit crisis. Policymakers must act swiftly to enact measures to restore credit capacity.”

Commercial real estate plays a vital role in the national economy. Income-producing commercial property is valued at approximately $5 trillion. The commercial sector provides more than 9 million jobs and generates millions of dollars in federal, regional, and local tax revenue. Local governments, in particular, depend on this revenue for roughly 70 cents out of every dollar in local government budgets. Tax revenues from commercial real estate provide vital public services including education, road construction, law enforcement and emergency planning and response.

“Commercial real estate creates the framework for much of what happens in our economy,” said Robert Toothaker, RCA chairman. “A major collapse in this area would be felt throughout the economy.”

Addressing the crisis in commercial real estate markets will require a multifaceted approach. Stabilizing the mortgage-backed securities market is one component essential to a successful recovery plan, because of the importance of the mortgage and housing markets to economic recovery.

“Many property owners are concerned that during 2009 and 2010 they will be unable to refinance existing loans, including land and residential development projects, and that lenders may consider loans on performing properties in default because of problems determining the fair market value of those properties,” said Toothaker. “Mark-to-market accounting rules should be made more flexible. The U.S. Treasury and Federal Reserve also should exercise their authority to implement and expand the Term Asset-Backed Securities Loan Facility. The TALF should be encouraged to purchase commercial mortgage-backed securities and conventional commercial real estate loans to help stabilize this market.”

The work group also recommended appropriate tax policies to help strengthen the commercial real estate market. “Any changes that would make investment in commercial property less attractive would reduce property values in an already fragile marketplace. Capital gains rules that apply to appreciated property, like-kind exchanges and carried interests must be kept at the existing 15 percent, and passive loss rules should be suspended,” Toothaker said.

Finally, a comprehensive program for recovery must stimulate and support investment in commercial real estate. “We need to provide federal funding for capital improvements to our nation’s infrastructure, including transportation, roads and energy grids. We must avoid policies that artificially raise the cost of construction and operation of commercial real estate properties. And the commercial real estate sector needs to invest in energy efficiency and environmentally friendly initiatives through tax and other incentives,” Toothaker said.

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