Experts Turning Pessimistic about CRE Property.

Are commercial real estate prices on the way down, adding additional surveillance effort for servicers? Certainly, they are not going up as fast as they were during the peak of the cycle in the last couple of years, when, for instance, Sam Zell sold Equity Office Properties to Blackstone Real Estate Partners, who immediately turned around and sold the EOP properties piecemeal. This sort of speculation has caught up with at least one of the buyers of these properties, Harry Macklowe, who is reportedly finding it difficult to refinance short term borrowings on these properties into longer term financing as the real estate capital markets have tightened up.

Other reasons are also being cited in the industry as to why commercial real estate prices are going down, ranging from a rise in capitalization rates, as risk gets reassessed, to shorting of the CMBX index by hedge funds. At a recent industry convention, industry participants even said that the CMBX which was expected to provide transparency and benefit the industry has turned into a de facto pricing tool that is reflecting the narrow moves of these hedge funds, rather than broader market fundamentals, causing some participants to question whether the introduction of the CMBX is turning out to be a good move for the industry.

As well, there are fears about a recession, which could turn out to be a self-fulfilling prophecy at a time when economic performance has been dragged down by the housing sector.

In a recent teleconference on the outlook for commercial real estate, JPMorgan analysts said that commercial real estate prices in the United States are likely to decline 10% to 20% during the course of an ongoing downcycle. Margaret Cannella, JPMorgan's head of global credit research, noted that while there will not be a state of crisis in the commercial real estate sector similar to the one seen in the early '90s, investors may nevertheless see a little pain.

Alan Todd an analyst in the Wall Street firm's global structured finance research group, expects loss of about $120 billion, representing about 4% of the $3.2 trillion in commercial real estate debt outstanding. He expects about $40 billion of this loss to be borne by investors in collateralized debt obligation avenues, and about $60 billion by balance sheet lenders. Commercial mortgages coming due for refinancing are likely to face problems due to declining property values and less prospects ...