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Geithner's plan may not save commercial real estate

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Treasury Secretary Timothy Geithner's financial stability plan may come too late to rescue the commercial property market, which is following housing into a slump.

Lending has dried up as $171 billion of commercial mortgages held by non-bank investors come due in 2009, according to the Mortgage Bankers Association. Issuance of commercial mortgage-backed securities, which supply cash for lenders to make more loans, fell 95 percent in 2008, according to JPMorgan Chase & Co. (NYSE: JPM) Geithner wants to expand an existing federal lending program to buy the securities and spark loan-making.

“The weakness in housing is bleeding into the commercial real estate market,” said Michelle Meyer, an economist with Barclays Capital Inc. in New York. “If the distress in the real estate market was contained to housing, particularly to subprime, which a lot of people thought, the argument that it wouldnít bleed into the commercial market would be true. But it’s not contained.”

The highest number of bankruptcy filings by office, retail and apartment owners were in most of the states hardest hit by residential foreclosures in the fourth quarter, according to a Bloomberg map based on data from commercial broker Marcus & Millichap Co.'s Special Assets Group and RealtyTrac Inc., a seller of default data.

For the first time since at least 1959, U.S. consumers spent less last year as the value of their homes plunged, according to the Bureau of Economic Analysis. That hurt retail outlets and their landlords, and the jobless rate, at a 16-year high, pushed down the price of office space as employers shrank their businesses.

Geithner may expand the Term Asset-Backed Securities Loan Facility, a $200 billion Federal Reserve fund now set up to purchase school, car, credit card and small business loans, to $1 trillion and use it to buy the highest-rated commercial and residential mortgage-backed securities.

“Heaven knows these real estate entities need access to debt, so anything that helps is a plus,” said Rich Moore, a real estate analyst for RBC Capital Markets in Solon, Ohio. “The mere appearance of government support will be helpful.”

The Bloomberg REIT Office Property Index, which measures the performance of 14 real estate investment trusts, has declined 49 percent in the last 12 months and 18 percent from the beginning of the year through Feb. 11.

“There's no question that the commercial real estate market is under a great deal of stress and it’s going to continue to be and will probably be worse a year from now than today,” Bank of New York Mellon Corp. Chief Executive Officer Robert Kelly told Congress Feb. 11.

Sales of commercial mortgage-backed bonds fell to $12.2 billion last year, compared with a record $237 billion in 2007, according to JPMorgan Chase data. The last sale of a fixed-rate, non-government-supported commercial mortgage-backed bond was June 19, 2008, Bloomberg data shows.

“The problem is the sudden about-face,” said Harley Goldstein, partner and head of the bankruptcy and restructuring group for Bell, Boyd & Lloyd LLP in Chicago. “We went from an economy where banks threw money at anything to an economy where banks don't lend to anybody. That’s why we have this train wreck.”

The U.S. housing market shed $3.3 trillion in value last year, according to Zillow.com, a Seattle-based real estate data service. Every dollar lost on home values translates to six cents less in consumer spending, meaning that almost $200 billion was cut out of the retail economy in 2008, according to Ethan Harris, co-head of U.S. economics research for Barclays Capital in New York.

“Directly and indirectly, the housing market collapse accounts for more than half the recession right now,” Harris said in an interview.

With the exception of Delaware, where many of the companies are registered but do not have headquarters, court districts in California, Florida, Arizona and Georgia had the most commercial real estate companies filing for Chapter 11 bankruptcies in the three months ended Dec. 31, according to Marcus & Millichap.

Arizona, Florida and California followed Nevada as the states with the most residential foreclosure filings and Georgia was No. 7, Irvine, Calif.-based RealtyTrac said.

The Marcus & Millichap data covers Chapter 11 filings in bankruptcy court districts by commercial real estate businesses, said Jacob Steele of the company's special assets group in Denver. RealtyTrac collects data from more than 2,200 counties that are home to more than 90 percent of the U.S. population.

“The commercial real estate market hasn't been a focus, and it’s hard to debate that that wasn’t appropriate,” said Dave Cardwell, vice president of capital markets for the National Multi Housing Council in Washington, an apartment landlord organization. “Now the government can now take preventative steps to shore up commercial real estate.”

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