Between 2010 and 2014, $770bn in commercial loans will be on properties in negative equity, and may need to be written down, according to a study by Foresight Analytics, a real estate research firm. The report is likely to only add to the woes surrounding the current commercial real estate (CRE) sector. The firm projects 36% of the $270bn set to mature will be under water in 2010. Afterward, Foresight said, that figure will only continue to increase. It’s projected to increase to 49% in 2011, 63% in 2012, 61% in 2013 and still above half at 57% in 2014. With the amount of underwater loans and delinquencies on the rise in many major cities in the US, the Congressional Oversight Panel (COP) held a hearing in Atlanta on how today’s commercial real estate (CRE) problems, largely unanticipated by regulators, may affect the refinancing of commercial loans over the next few years. Congress established COP in October 2008 to oversee the spending of the $700bn from the Troubled Asset Relief Program (TARP). COP also keeps tabs on large metropolitan commercial areas. For example, the vacancy rates for Atlanta retail and office space grew throughout 2009, topping 20%, according to a statement from Elizabeth Warren, chair of the COP. Values also declined across all aspects of commercial property, and the price-per-square-foot of office space fell 50%. Doreen Eberley, acting regional director at the Atlanta regional office of the Federal Deposit Insurance Corp. (FDIC), said the fall in CRE prices is sharper than home prices by some measures. Nationally, prices for CRE properties fell over 40% from their peak in October 2007, according to the Moody’s Real Estate Analytics LLC (REAL) Commercial Property Price Index. Ebberley noted a failure to foresee the current and possible future struggles in CRE. “With the benefit of hindsight, it is fair to say that during the years leading up to the crisis, systemic risks were not identified and addressed before they were realized as widespread industry losses. The experience in Atlanta provides an example,” Ebberley said. Warren said these declines severely threaten bank balance sheets and contribute to the failures of 30 Georgia banks since August of 2008—more than in any other state in the nation. She added that Atlanta’s plight could foreshadow a problem across the country. Commercial loan defaults could potentially cost taxpayers additional billions in bailouts and empty storefronts translate to more lost jobs and productivity, she said. “Because the modern financial industry is so deeply interconnected, a downturn in the commercial credit markets could spread to the rest of our financial system,” Warren said. To provide some scope on the size of the CRE market, Jon Greenlee, a member of the Federal Reserve Board of Governors, said the credit performance of loans in banks’ portfolios and loans in commercial mortgage-backed securities (CMBS) “sharply deteriorated.” Of the nearly $3.5trn of outstanding CRE debt, banks and thrifts held roughly $1.7trn on their books. Banks held another $900bn in CMBS collateral, while investors held the remaining $900bn. Fitch Ratings, reported the amount of CMBS delinquencies reached 4.71% at the end of 2009 and could climb as high as 12% at the end of 2012. The mortgage-data provider, Trepp, had the delinquency rate for CMBS above 6% in December 2009, and data from the credit-rating agency Realpoint showed a delinquent unpaid balance in CMBS climbing 16% in November 2009 to $37.93bn. According to Warren, a potential CRE crisis would pose a particular threat to smaller and mid-size banks, but that’s not where it could stop. An article in the Atlantic pointed out that despite many similar reports, Sheila Bair, the chairperson for the Federal Deposit Insurance Corp. said that CRE credit problems are affecting big and small banks alike –which would not rule out more help from the government. Ebberley added that businesses rely on banks to provide credit for operations, and the FDIC released a CRE Workout Guidance in October 2009 to encourage “prudent and pragmatic” CRE workouts. “The purpose of the guidance was to approach the huge amount of refinancing on the horizon. We need to find a way to restructure these loans,” Greenlee said. “We needed to find a way for people who were able to pay to stay in these properties.” But Warren pointed out that under the new Guidance, the banks’ accountants do not have to reflect a negative loan-to-value ratio in their books. “What concerns me is how this helps improve confidence in investors,” she said. “We have come across incidents where banks are slow to recognize problems,” Greenlee said. “In terms of specific banks, there continues to be some questions there.” In a further effort to open lines of credit for businesses, the Fed initiated the Term Asset-Backed Securities Loan Facility (TALF) program to stimulate lending by allowing private investors to purchase securities with a matching government investment. The reach of the program into legacy CMBS aimed to aid price discovery and provide liquidity for the commercial mortgage market, which faces a credit crisis of its own. The Federal Reserve Bank of New York earlier in the month received requests for $1.45bn of government loans to buy securities backed by commercial mortgages. But Greenlee reiterated that the Fed is on track to wind down TALF at its scheduled end date of March 31, 2010. Write to Jon Prior.