Lance Falow of The Heathcote Group comments on the Commercial Real Estate market.

In nearly 50 percent of the loans coming due, the borrower owes more than the property is worth, raising the risk of a wave of defaults. Loans likely to fail were made at the height of the run-up in valuesIt's clearly one of the top priorities from a risk-management standpoint and it will be highly dependent on what happens with the economy. Instead of lending, the banks put more money in government securities-where it provides that capital cushion and generates a nice bit of interest income for the bank.The bank can borrow from the government at very low rates, but it can't get much of a return-as long as it invests that money prudently, rather than in some high- interest, high-risk investment. "That is what causes a credit collapse like this,"says Lance Falow Partner at The Heathcote Group.

Everybody is holding their cash. Banks, which have provided most of the interim, 3-to7-year mortgages, are still reluctant to make commercial real estate (CRE) loans as they pare down their CRE concentrations under pressure from regulators and shareholders.
The volume of loans from sales or refinancing this year will be moderate, and that’s good news. “There isn’t enough capital in the system, especially if you look out two to four years when a greater volume of loans starts maturing," adds Falow. "All the traditional lending sectors are contributing to that shortage."

In 2010, approximately $475 billion of commercial real estate loans nationwide are expected to maturedelinquencies on loans in commercial mortgage-backed securities will reach 6 percent by the first quarter of this year and could reach 12 percent by 2012.
"At the end of the day, we need better real estate fundamentals,” says Falow.