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Fed targets commercial property with target rate Print E-mail
Wednesday, 12 August 2009


By John Goff
Some observers may be calling for the Fed to raise interest rates to avert asset bubbles once the recovery kicks in. But concerns about one of those bubble-makers—commercial real estate—appears to be keeping the central bank from boosting borrowing costs.

The Fed today announced that it will look to hold the line on its overnight rate, which stands at close to zero percent. In making that decision, officials at the central bank no doubt took into account what's currently going on in the commercial real estate sector.

What's going on can best be described as a bloodbath. Prices for commercial properties in the U.S. have plunged close to 35 percent from their peak in October 2007. Those plummeting values have smacked the heck out of the banks who financed the construction or acquisition of the real estate.

So far, about $2.2 trillion of commercial properties bought or refinanced since early 2004 have lost value since the transaction, according to Real Capital Analytics, a research firm based in New York. Indeed, the equity in $1.3 trillion of properties is "at great risk if not already wiped out," says the firm.

It doesn't look like things are getting a whole lot better, either. Real Capital Analytics says commercial property sales so far in 2009 works out to just 7% of the volume achieved at the peak in the first half of 2007.

One somewhat positive note for the owners of commercial real estate: lenders don't seem overly eager to foreclose. That reluctance has giving rise to a new phrase in the business: pretend and extend.

Nevertheless, officials at the central bank remain glued to developments in the sector. The Fed is “paying very close attention,’’ chairman Ben Bernanke told the Senate Banking Committee in July. “As the recession’s gotten worse in the last six months or so, we’re seeing increased vacancy, declining rents, falling prices, and so, more pressure on commercial real estate.’’

Case in point: Maguire Properties, one of the largest office landlords in California, reported big losses this week. Maguire indicated it will default on more than $1 billion worth of loans on seven buildings in prime locations in Orange County and downtown Los Angeles. By defaulting on the loans, Maguire might be able to reduce enough debt to keep the company out of Chapter 11.

For its part, the company insists that it is not contemplating a bankruptcy filing. "We believe a successfully executed board-approved plan will eliminate the adverse effect these assets have had on the company’s cash position,” said Nelson Rising, Maguire CEO, adding that the landlord remains "sharply focused" on liquidity issues.

Seems the same can be said of the Fed.

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