Debt in US and UK commercial markets could be next property bubble, analysts warn
The property debt crisis in Dubai is a warning for the next real estate bubble with some analysts wary of the impact of debt on commercial markets in the US and UK.
‘Dubai shows how real estate has such a strong effect on global economies now,’ according to Jack McCabe, an independent real estate analyst and president of McCabe Research & Consulting in Florida.
He points out that anywhere from $750 billion to $2.2 trillion in cheap financing will come due within the next three years in the US commercial market.
That debt was used to finance all kinds of developments around the world, both directly and through commercial mortgage-backed securities.
Analysts are warning that the the commercial real estate sector in the US seems to be in ‘free fall’.
Values are down about 40% from a year ago, recent market studies show.
Real estate deals aren’t happening because banks aren’t making commercial real estate loans because they’re under pressure from regulators to reduce their loan exposure.
It will be 2011 at the earliest when investors and consumers can expect to see the start of a recovery, according to Mark Dotzour, the chief economist with the Texas A&M Real Estate.
Little property is being sold because buyers believe that property values will go down more, he said.
Next year, real estate prices and rents will continue to fall, Dotzour predicts and occupancy levels will also drop as companies continue to downsize to increase profits.
A turnaround will begin in 2011 and be in full steam by 2012 when job growth will accelerate, he added.
‘According to McCabe the effect could be global.
‘During the boom, everything doubled in value when it shouldn’t have, and all of that was facilitated by credit, not by an increase in real value,’ McCabe said.
‘Now we’re going to see the effects in the commercial markets, and it’s going to be very severe.
So many of these projects were financed with five to seven year financing, and that's just now coming up to be refinanced.
But now, the money’s not there,’ he added.
And a new report from property consultants CB Richard Ellis shows that the UK commercial property market faces a tough time ahead as almost half of the outstanding £280 billion real estate debt is due to mature before the end of 2012.
Almost one third of that is likely to become delinquent, according to its research.
The report shows that 27%, or £79 billion, of the total is debt secured on poor quality real estate and is likely to be impaired, will struggle to get refinanced, or will become delinquent.