Dallas economist: Commercial real estate sector will experience decline, but not as deep as in the 1980s

Vacancies in the commercial real estate sector are high, and weak cash flows do suggest that Federal Reserve Chairman Ben Bernanke’s warning this week about the commercial real estate market is a valid one, but North Texas won't see a repeat of the late 1980s, a Dallas-Fort Worth area economist said Tuesday.

Federal Reserve Chairman Ben Bernanke said in a speech this week that demand for commercial property is down, causing a “sharp deterioration in the credit quality of commercial real estate loans on the banks' books and on loans that back commercial mortgage-backed securities.”

Bernanke said smaller regional banks and community banks that have higher concentrations of commercial real estate loans may feel a deep pinch, and the market for securitization backed by CRE loans has pretty much closed. Bernanke warned of banks facing decisions on whether they will have to roll over maturing debt or foreclose on loans.

Economist Bernard Weinstein of Southern Methodist University said Tuesday, “I don’t think there’s any question commercial real estate will be struggling for the next year.”

He added that lenders and regulators are going to have to come up with some type of forbearance -- or some type of program to deal with some of the troubles brewing for mortgage backed securities on the commercial side of the market.

“I don’t think the overhang of commercial real estate is as threatening to the economy or to financial institutions as all the residential mortgage backed securities, but it is still a big number," he said.

Chuck Dannis, president of Dallas real estate appraisal firm Crosson Dannis Inc., elaborated on the sector's struggles saying the problem lies in the fact that many mortgage-backed securities will be maturing in the next year or two. Generally, when they mature, someone comes in and refinances the loan, Dannis said. But a dilemma has developed in that the market for refinancing has essentially dried up, he added.

"The borrower has two options: Put a bunch of money in there to make up the gap or give the property back," he said. "What lenders are trying to do is give borrowers time ... extending the loan."

He added that Dallas-Fort Worth has less to worry about than other reasons. Dannis said D-FW will feel pain in the commercial sector, but not as much because the area is still better when it comes to providing jobs, which is what eventually lifts activity in the commercial sector.

Going forward, Weinstein said he hopes to see the economy growing again by 2011, which will allow commercial properties to benefit from more businesses demanding leasing arrangements and new activity in the commercial market.

Despite some of the gloom and doom, Weinstein said the commercial real estate sector will not face what the Dallas-Fort Worth market experienced in the 1980s. He remembers banks getting hit hard and closing down in the late 1980s when commercial loans became a problem. Looking forward, he says it’s “not as bad as it was back then. The commercial real estate sector will recover ... as the economy improves, demand for commercial real estate will improve.”