Commercial Loans Are the New Subprime Mortgages

Consider this: Financing for bigger commercial real estate transactions is now almost as difficult as acquiring a subprime mortgage.

How’s that for perspective?

The Federal Reserve recently surveyed senior loan officers from 60 large domestic banking institutions and the U.S. agencies of 24 foreign banks. The results: In the fourth quarter of 2008, 87 percent of loan officers said they have tightened their lending standards for commercial real estate loans, a marked increase from the last quarter of 2007, when only 50 percent reported tightening standards.

Let’s contrast that to the subprime mortgage data: In the fourth quarter of 2008, 100 percent of loan officers reported tightening standards for subprime loans, in contrast to 55.5 percent at the same time the year before.

“We have a sense of just how tough it is to get a subprime mortgage, and by many measures, it is as difficult a financial environment for the commercial real estate borrower,” said Sam Chandan, the president and chief economist for Real Estate Economics, who shared the Federal Reserve data with The Observer.

“There’s a similar concern about the underlying fundamentals,” Mr. Chandan said. “Where commercial real estate is different is we don’t have the same types of delinquency and default rates that we do for residential. But I think that, in part, reflects that we’re earlier in the cycle.”

Dan Fasulo, managing director of Real Capital Analytics, said the data underscored a “disturbing” trend.

“Good, healthy owners can’t get loans right now,” Mr. Fasulo said. “And that’s really spooked the industry into action. We have our representatives down in Washington right now. There’s just too much debt that needs to be refinanced within the next year. What everyone’s worried about is the fact that it doesn’t look like the debt markets have the capacity to handle the demand coming down the pipeline. It’s scary.”

drubinstein@observer.com