Distress among commercial real estate mortgages in New Jersey is intensifying, with more properties in the state going back to the lenders. Some industry insiders say a crisis may be in the works if the economy continues to falter.
“You’re certainly seeing an increasing rate of foreclosures, and of lenders taking back properties,” said David Bernhaut, executive vice president at the East Rutherford office of Cushman & Wakefield, a commercial real estate brokerage. “It’s distress that everybody feels and senses.”
New Jersey currently has nearly $3.6 billion of distressed commercial assets, according to Real Capital Analytics, a New York-based research and consulting firm. Distressed assets include those in foreclosure or bankruptcy, have been restructured or modified, or have been taken back by the lender through foreclosure.
Many properties acquired between 2005 and 2007 — when prices were at their highest — were overleveraged, Bernhaut said. “What you’re seeing now is difficulty in refinancing assets.” The commercial mortgage-backed securities market — a major source of commercial real estate financing during those years — is no longer active, because of the large losses the holders of these securities have suffered, while “lenders have gotten much more conservative, so they won’t lend the type of proceeds necessary to pay off existing mortgages,” he said.
eal estate investment activity in New Jersey peaked from 2005 to 2006, and with most commercial real estate loans having five-year terms, the majority of those mortgages are due to mature between 2010 and 2012, he said.
Delinquencies made up 3.7 percent of commercial mortgages in New Jersey during the second quarter of 2009, up from 1.6 percent in the same period a year ago, according to Foresight Analytics, an Oakland, Calif.-based research firm. An estimated $7.4 billion of commercial mortgages are expected to mature between 2009 and 2011 in New Jersey, which ranks 13th in the nation in terms of the dollar amount of commercial mortgage maturities during the two-year period, the firm said.
Foreclosures and deeds in lieu of foreclosure have affected more than 15 buildings in New Jersey in 2009, and will become more and more prevalent during the second half of 2010 and 2011, as more commercial real estate debt matures, said David Simson, vice chairman and chief operating officer of New Jersey operations for commercial real estate services firm Newmark Knight Frank.
For properties purchased in the last five to six years, “the debt structure associated with those buildings may very well exceed the current market value of those buildings,” meaning the owners have no equity, to offer concession packages to prospective tenants, nor can they pay service providers, he said.
Edward Mermelstein, co-founder and managing principal of Edward A. Mermelstein & Associates, a New York law firm that works on deals in New Jersey, said lenders are putting themselves at risk as the gap between a loan’s face value and market value continues to widen.
“How long can you extend loans as property values continue to come down?” he said. “Many of these regional lenders are going to have no place to go except out of business.”