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Banks hold large amounts of
debt tied to business properties. Lower property values and rents are making it
harder for owners to pay their loans
The American housing collapse
was a major cause of the recession. The housing market is showing new life
after three years of falling prices and too much supply. But now there are
worries that banks could face big losses next on business properties.
For example, one effect of a weak economy is less demand for office space. As a
result, property owners earn less and charge less in rent. This puts pressure
especially on owners who borrowed a lot money.
Easy credit helped fuel an explosion of development. The market hit a high
point in two thousand seven.
Now, late payments are growing. Almost three percent of commercial mortgages
were reported at least ninety days late between April and June. That was double
a year earlier.
One major lender lost more than a billion and a half dollars in the second
quarter. Capmark Financial Group said it might seek bankruptcy protection from
its creditors. Medium and small banks also face a growing risk.
Commercial properties face two serious problems. One is falling prices - down
by one-fourth since two thousand seven. The other is refinancing.
Most commercial real estate loans have terms of ten years or less. They often
end with a large payment, a balloon payment, which owners usually refinance.
But lower property values and tighter lending requirements mean a harder time
getting new loans.
The United States is not alone. Commercial rents in Moscow, Hong Kong, Singapore
and Mumbai have fallen thirty percent or more.