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CRE Needs Much Larger Boost to Avoid Bust

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Financing for the commercial real estate (CRE) market is looking at a near collapse in the next two years as short-term debt structures come due in the coming months. Efforts within the industry to fix the financial issues in the market aren't working and the industry will likely require a much larger involvement from the United States government in order to stay afloat, according to Ross Prindle, managing director of the Real Estate Services practice at independent financial advisory and investment banking firm, Duff & Phelps. "Unfortunately the industry is unable to come up with a one-size fits all solution to refinancing commercial mortgage debt," he says. "Efforts to help CRE, such as [the Term Asset-Backed Securities Loan Facility], only include top-rate investment grade tranches." "While these efforts are helping, a clearinghouse of lower tranches of [commercial mortgage-backed security] debt is necessary so the market doesn't get overloaded," he adds. Duff & Phelps serves an advisory role to the Troubled Asset Relief Program (TARP) Congressional Oversight Panel on valuation issues and was recently hired to perform valuation work related to the repayment of TARP funds by banks. In commercial real estate, as with residential, a lack of credit is also weighing the market down, according to the Fed's most recent Beige book. However, Prindle states that the different types of roles commercial properties fulfill, such as with industrial, retail or in health care, make crafting a one-size fits all solution difficult. The woes of otherwise strong commercial business models highlight the coming troubles in the industry. For example, instances where the liquidity issues that led the Extended Stay hotel chain to file for bankruptcy, the expected bankruptcy of servicer Capmark and the near collapse of lender CIT, are not the result of any malfeasance on the part of individual operating structures but an indication of the coming collapse of the commercial real estate market. Additionally, the securitization of these properties (CMBS) means that investors "all over the world" stand to lose big without a government-led rescue plan dedicated to CRE. And, also in contrast to residential real estate, foreclosure is not an acceptable end result. "In the end, banks don't want to own CRE assets," Prindle adds. "As my firm helps to connect borrowers to lenders via negotiations, in order to restructure debt, the market will need a much greater capital cushion to support this." Write to Jacob Gaffney.

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