NEW YORK - In early December, Simon Property Group Inc (SPG.N), the largest U.S. real estate investment trust and mall owner, obtained a slightly larger revolving credit facility to replace an existing one.
Curiously, the existing $3.5 billion credit line was not due to expire for more than a year. So what's the rush?
There was and is a fair bit of uncertainty in the bank market, Simon Chief Financial Officer Stephen Sterrett told Reuters, citing recent bank failures. Simon has a strong credit rating of A minus, which affects the company's ability to borrow.
Allocation of capital by the banks is becoming very precious, Sterrett said.
Many commercial real estate borrowers are saying the same. But banks disagree. Lenders including Bank of America Corp (BAC.N), the largest U.S. bank, have said demand for loans is shrinking. Wells Fargo & Co's (WFC.N) Chief Executive John Stumpf earlier this month said finding attractive loans and other assets will be one of the biggest challenges for banks next year.
The problem is not lack of credit, it's the lack of bankable borrowers, said Richard Jones, partner and co-chair of the finance and real estate group of law firm Dechert LLP.
Banks, slammed by more than $1 trillion in writedowns and credit losses since the beginning of the financial crisis, have become more cautious lenders.
Enough of the banking community is not just risk averse, they're fighting the last war, said Tom Mitchell, a banks analyst at Miller Tabak & Co.
Banks have become particularly wary of commercial real estate lending, which has been hit by the double whammy of falling property values and a severe recession that has hurt the income streams of many properties.
While the financial crisis had its roots in the U.S. residential housing bust, some bank analysts have cautioned that the $3.4 trillion in U.S. commercial real estate loans maturing over the next several years could be the next train wreck slamming into banks.
From about $1 trillion in commercial real estate loans originated at the height of the property boom, about $120 billion in writedowns have been taken and more than $300 billion have yet to be written down, Mitchell estimated.
The U.S. commercial real estate boom, which began around2005 and quickly crumbled in the second half of 2007, has ripped the value of many buildings. Since the market peaked in October 2007, prices have fallen 43.7 percent, according to Moody's/REAL Commercial Property Price Index.
Loans are available, experts say, but certainly not for hundreds of millions of dollars. Additionally, refinancing mortgages -- replacing a maturing mortgage with a new mortgage -- is a challenge. Tighter lending means new loans will cover a lower percentage of the value of the property, which itself has fallen in value.
And unlike loans made during the boom years, the new loans are based on current cash flow of stable, well-leased buildings. During the recent heyday, they were based on future expectations of strong rental growth.
At least some banks are still making loans, according to Foresight Analytics. Outstanding nonresidential commercial mortgage loans have been increasing, but at a slower rate, meaning there are fewer new loans being made.
Nonresidential commercial mortgage loans grew 0.3 percent in the third quarter, the smallest increase since commercial real estate lending fell off in the third quarter of 2007, according to data from that company.
There's capital available if you're underwriting to today's values, Matt Anderson, a partner of Foresight Analytics, said.
At the same time unsecured credit loans declined by $17 billion, or 15 percent, since the second quarter of 2008, according to Foresight Analytics.
Many property owners are not rushing to refinance since low rates have enabled borrowers to stay current with their interest payments. Despite the drop in the value of their buildings, they have been reluctant to sell at the depressed prices, especially when they continue to collect management and other fees.
In 2009, property sales over $5 million of the four main types of U.S. commercial real estate -- office, industrial, retail and apartments -- totaled $43.86 billion, down 67 percent from last year and 90 percent from the peak in 2007, according to Real Capital Analytics.
Lenders and borrowers are likely to start feeling the pain when loans made during the boom mature and they are unable to replace the principal. Jones expects that to happen in 2010.
These zombie properties are chickens with their heads cut off, Jones said. They're still strutting around even though they're deader than doornails, and they're going to have to change hands.
When these loans mature, the borrower will have to come up with more money to fill the gap between the lesser new loan and the greater expiring loan, or the bank will foreclose and sell the property at the lower price and take a hit.
(Reporting by Ilaina Jonas and Elinor Comlay, editing by Maureen Bavdek)