| The commercial real estate (CRE) market peaked in | | | | be refinanced over the next four years. With so much |
| 2007, and has since been in a prolonged process of | | | | debt outstanding and in need of refinancing, the BofA |
| collapse. This is true for asset valuations across | | | | announcement makes a bad situation worse. |
| property types (residential apartments, office, industrial, | | | | Between 50 percent and 60 percent of loans on |
| self storage, health care, etc.), as evidenced by rising | | | | skyscrapers, hotels, shopping malls and apartment |
| capitalization (cap) rates across the board. | | | | complexes failed to refinance within a few months of |
| Cap rates are to real estate what P/E ratios are to | | | | their maturity date this year, Bank of America Merrill |
| stocks; they measure the value investors are willing to | | | | Lynch analysts said in a report. |
| attribute to each dollar of net operating cash flow | | | | As a comparison what went on during the boom |
| generated from the property. In other words, cap rates | | | | years, we should note that a record of $251.1 billion in |
| can be computed by dividing the net operating income | | | | bonds tied to commercial mortgages were issued in |
| (NOI) by the value, or amount that an investor paid for | | | | 2007 compared to $1.7 billion issued so far in 2010. |
| a property. | | | | Commercial real estate firms are increasingly |
| Rising cap rates means that investors are demanding | | | | desperate. According to Thomson Reuters there are |
| higher risk premiums on their commercial real estate | | | | at least 12 CRE firms planning to sell equity in IPOs |
| investments. The going rate for high quality CRE is | | | | over the next year. Given that equity sales earlier this |
| about 7 percentage points above the 10-year | | | | year have either completely failed to materialize, or |
| Treasury bond, or equivalent maturity "risk-free rate." | | | | have been executed at deep discounts, it is not likely |
| In a continuation of the CRE saga, Bank of America | | | | that CRE firms will be able to re-capitalize properties |
| announced that over half of commercial mortgages | | | | that have decreasingly profitable operating margins. |
| have been unable to refinance as notes reach | | | | Without a big government bailout, the 41 percent CRE |
| maturity. | | | | decline since 2007 might just be the start of something |
| Nearly $1.24 trillion of commercial mortgages need to | | | | much worse. |