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By Jason Stipp | 06-14-2010 12:31 PM

A Soft Landing for Commercial Real Estate?

Morningstar markets editor Jeremy Glaser recaps the latest buzz on commercial real estate, plus Sam Zell's choice words from the REIT Week Forum.

Jason Stipp: I am Jason Stipp for Morningstar. In addition to the unemployment situation and the woes in Europe, one of the overhangs on the recent recovery is real estate.

Here with me to tell us a little bit about the state of the real estate industry is Morningstar markets editor Jeremy Glaser. He just got back this week from the REIT Week Conference. Thanks for joining me Jeremy.

Jeremy Glaser: You're welcome, Jason.

Stipp: So, first thing, I think, is still on a lot of people's minds is the whole issue of commercial real estate. So, it seems like there is still some problems with residential, but we've worked through a lot of that. Everyone's waiting for commercial to be the next big thing, is it going to be the next big problem?

Glaser: I don't know if it's going to be the next big problem, but certainly a problem, and one that's going to have to work out over the next couple of years. Unlike, residential real estate where we have seen the huge bursting of the bubble, and you've seen a lot of people having to sell at very depressed rates, and you've seen a lot of distressed sales and foreclosures. Things have been relatively quiet on the commercial real estate front. Lenders are extremely hesitant to take back properties that they know they're not going to be able to do a lot with, and a lot of the owners of commercial real estate continue to want to extend their loans and to get bridge financing to hold on to that building as long as they can.

In fact, a lot of the regulators are kind of turning a blind eye to this and are doing what's called "extend and pretend" on a lot of bank loans. So, even though the banks know that they are underwater on a mortgage and should take a write-down, they are letting them hold it at the full value, and that, as the banks get stronger and produce enough cash and have that capital reserve, they'll be able to slowly write down those loans over time.

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