As part of the bank stress tests, the Fed is projecting losses of up to 12% on commercial real estate loans over two years. If the Fed is right, the country's banks, which hold $1.8 trillion of commercial real estate debt, would lose $216 billion by the end of 2010.
The ominous forecast isn't news to Sam Zell, who liquidated his enormous commercial real estate holdings in early 2007. According to Zell, "Very few '03 to '07 financings are above water... You have more debt than you have value." As a result, the market for commercial property is frozen. REITs won't sell a property with negative equity... They'd only have to contribute more equity to cover the loan. So troubled REITs are holding out as long as they can, hoping the government's actions will "reflate" property values and rents, helping them cover ballooning interest payments.
So... we have a race between the government's efforts to reflate the property bubble and the coming maturities of commercial real estate loans. Some of the stronger REITs, like Simon Property Group and Kimco Realty, are raising equity hoping to take advantage of the coming bankruptcy sales.