Atlanta FRB - Overleveraged? Investigating the Availability of Commercial Real Estate Credit

Welcome to the Federal Reserve Bank of Atlanta's Perspectives on Real Estate podcast series. I'm Brian Bailey, senior financial policy analyst with the Federal Reserve Bank of Atlanta. Today, we're talking with Ann Hambly, CEO and president of 1st Service Solutions. Ann served as a panelist at a conference hosted by the Atlanta Fed on December 1 called Exploring Impediments to a Real Estate Recovery: A Policy Discussion. This podcast will highlight some of her remarks on the availability of credit as it relates to commercial real estate.

Ann, thank you for joining me today.

Ann Hambly: Thank you for the opportunity.

Bailey: First, why is the availability of credit so important for the commercial real estate market?

Hambly: Well, let me set the stage, actually first, and tell you that the primary problem, I think, with commercial real estate right now can be simply worded as "overleveraged." And so, regardless of the property type, or the location of the property, the ones that are in trouble today are the ones that were overleveraged in the last few years before our crash, or some people even call it "the storm." So, before the storm—and those were years of 2005, 2006, and 2007—and so, the vast majority of the defaults we have today are on loans where the debt was put in place in those years, 2005–2007, and there really was just too much debt put in place. There was a little bit of it that played into this was the fallacy that commercial real estate values could only go up, so people banked on that and put a lot of debt in place. Now, you add that to the fact there are $1.7 trillion of maturities that are going to happen in the next five years in commercial real estate, and what you've got is a recipe for a disaster, or a "perfect storm." So, it's going to take a massive amount of credit to solve the default problems and to allow there to be some available credit for the refinances that are going to have to take place at the maturity.

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