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WASHINGTON, DC-Real estate experts on Capitol Hill said Wednesday that their industry has been about the only thing propping up the American economy in this downturn. But in the aftermath of the September 11 terrorist attack on the Pentagon and New York’s World Trade Center complex, that turn due south may have now been made. Expert after expert told about 100 real estate professionals, association leaders and members of Congress that the nation is now in recession. These experts had gathered to dissect the impact of the attack on the New York real estate market in particular, but also on the office, lodging and residential real estate markets nationwide.

“The real estate industry is very much on the frontline of this crisis,” Owen Thomas told the gathering at the Rayburn House Office Building. Thomas, a managing director with Morgan Stanley, focused on New York and general trends in commercial real estate. Over one fourth of the commercial real estate in downtown New York was either destroyed or damaged from the attack, which demolished the trade center’s twin towers. To put the devastation in national perspective, Thomas said there is about 107 million sf of space in downtown New York, and that total alone would make it the nation’s tenth largest market for office space.

One issue that has impacted New York specifically, but will ultimately change the face of the real estate industry is the insurance cost for the damage, which has been broadly estimated from $20 billion to $40 billion. Thomas said that insurance companies have said individually and collectively as an industry they will be able to absorb the cost of the massive claims expected. But Thomas noted that reinsurers, which insure the insurance companies, have indicated they will not be able to insure acts of terror going forward. He said this change by those companies would directly affect the financing or reselling of buildings.

Another major issue is mortgage financing in general, particularly through the market for commercial mortgage-backed securities. Doug Duncan, chief economist with the Mortgage Bankers Association of America said that $22 billion worth of CMBS could be issued in the final quarter of the year, and Thomas expects a record $65 billion of CMBS to be issued for all of 2001. Duncan said issuers had learned some strategies from the financial crisis of 1998 that crushed the CMBS market. Those strategies appear to have kept the market steady through the crisis of September 11, he said. Thomas said there was $2.6 billion of debt on the buildings that were destroyed at the World Trade Center, and indications are at least the principal amount will be paid, according to servicers of that debt.

One expected fallout related to CMBS is the reluctance of investors to buy pools that include mortgages for lodging properties. “The ability to finance new projects is close to zero in the lodging industry,” Thomas said. Several major hotel companies have announced lower earnings expectations and layoffs in the aftermath of the attack.

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