How does the data in the chart correlate to what we hear is a coming meltdown in the commercial mortage market as companies default on their payments? Won't this increase supply and depress demand for new construction?
John Schlagetter

Jim Haughey: Problems refinancing short term commercial mortgages always occur at this stage of the real estate cycle and spillover partially into construction.

The commercial mortgage problem will get worse for about six more months and commercial mortgages will re main difficult to get well into 2011. The problem is worse in this cycle because of the September 2008 credit freeze.

Financial de-leveraging has reduced available credit; what credit is available is being rationed by tightening collateral and equity requirements in mortgage loans. $1 of bank deposits or capital now permits less lending than it did through summer 2008.

The impact on developers is not homogenous. While building asset values have tumbled as much as 40%, some real estate investors have enough equity or other available capital to refinance mortgage. But investors who leveraged their own capital too much or only have access to small local or regional lenders who are short of capital from too many bad loans are having their refinancing requests rejected. The consequence will be a lot of turnover in real estate ownership which will cancel some development plans.

That said, the drop in commercial construction is more due to the depth of the recession than to the financial problems that are unique to this cycle. Also, the turn to expansion in the commercial construction market in 2010 will be due to the reductions in new space supply already underway and the resumption of rising demand for space that will come, with a lag, from overall economic recovery. Six months ahead, the ability to refinance commercial mortgage will be a little worse than today but commercial construction — but not commercial real estate — will begin a gradual recovery, spurred by the overall economic recovery.

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