The Congressional Oversight Panel Releases Its Report on Commercial Real Estate Market Conditions

Sam Chandan PhD FRICS Real Capital Analytics and the Wharton School Andrew Florio and Ben Thypin Real Capital Analytics For a moment, Washington has turned the weight of its attention to commercial real estate. The Congressional Oversight Panel, established in 2008 as part of the Emergency Economic Stabilization Act, released its newest oversight report - entitled "Commercial Real Estate Losses and the Risk to Financial Stability" - on February 11, following field hearings in late January in Atlanta (see Erika Morphy's February 11 story on GlobeSt.com) .  The report addresses the potential for further deterioration in commercial mortgage performance to spill over into the broader economy, thereby threatening the nation's return to economic growth. The Oversight Panel concludes that "a significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every Americans." As defaults and bank losses rise, the likelihood of a large number of bank failures increases. Because exposure to acquisition, construction, and development loans and permanent commercial mortgage financing is concentrated on the balance sheets of smaller lenders, these sources of credit are at greater risk. In clarifying the relevance of its investigation for legislators and the custodians of taxpayer resources, the Panel's report goes on to explain the critical relationship between the banks most at risk from the commercial real estate downturn and the nation's small businesses: "Because these banks play a critical role in financing the small businesses that could help the American economy create new jobs, their widespread failure could disrupt local communities, undermined the economic and extend an already painful recession." For anyone familiar with our sector, the report's underpinnings - a real estate sector that lags the broader economy, the recent history of securitization, and the disproportionate contribution of regional and community banks in balance sheet lending - are well understood. Still, inasmuch as it draws new attention to the particular woes of the commercial real estate industry, the report has been well received by our representatives in Washington. In a statement coinciding with the Report's release, the Real Estate Roundtable offered that "[it] should be a must read for any policymaker looking to understand the scope of the problem and explore potential solutions." As reflected in the Roundtable's comments, the Panel's report deals extensively with the scope of the industry's problems. Many of its conclusions are based on testimony offered by industry representatives at a late-January field hearing on commercial real estate, held in Atlanta. Citing data provided by Real Capital Analytics, the Report describes how the volume of troubled assets is climbing and recovery rates are falling. While workouts activity is increasing, the process can be protracted and costly. Of 8,651 mortgages and properties currently in the process of foreclosure, in bankruptcy, or in the workout process, restructuring and modification had been concluded for just 725 as of December 2009. Another 1,314 distressed mortgages had been resolved through refinancing or a property sale. Although workout activity has increased in recent months, the sheer volume of distressed commercial real estate