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Commercial real estate faces a 'slow moving train wreck.' Here are fixes for lawmakers.

By Joy Wiltermuth

The commercial real-estate industry isn't looking for a bailout, but there are problems lawmakers can fix

The roughly $20 trillion U.S. commercial real-estate market has been facing a big liquidity crunch that looks to get worse if interest rates stay high as a deluge of debt comes due.

The potential for more carnage was in focus on Tuesday during a House committee hearing on the health of commercial real estate and regulatory changes that could possibly help stave off a crisis.

"We are not seeking a bailout," said Jeffrey DeBoer, president and chief executive at the Real Estate Roundtable, a major industry lobbying group, in testimony in Washington, D.C.

Instead, DeBoer talked of a "slow moving train wreck" bearing down on commercial real estate, especially with a backdrop where liquidity has been pinched and with roughly half of the estimated $4.7 trillion of the debt on commercial buildings set to mature through 2027.

Many of "these mortgages need to be extended and restructured," DeBoer said, adding that the banking system isn't currently encouraged to do that.

Here are three major takeaways on what lawmakers might do to help the industry work through major changes since 2020:

New equity, give credit

While office loans remain the industry's biggest concern, DeBoer said the broader commercial-property market could benefit from policies that incentivize "cash-in" refinances, or when new equity is used to restructure old, maturing loans.

Changes to tax rules could help encourage these equity infusions, DeBoer said. He also thinks banks should be allowed to reclassify formerly "criticized" loans once they are restructured as new "performing" loans, to help encourage "solidly underwritten," newly originated loans.

Related: 'No one is throwing good money after bad.' Why 2024 looks like trouble for commercial real estate.

Bolster office-to-housing

The lack of affordable housing isn't new, but the problem has been exacerbated by 15 years of underbuilding, said Doug Turner, a senior fellow of housing policy at the Center for American Progress, an institute focused on progressive policies from affordable housing to climate change.

But he also sees promise in the wreckage of the office sector, especially if underused buildings in big cities end up reconfigured as mixed-use properties that include retail space and amenities, as well as housing for a mix of incomes.

Turner estimates the U.S. currently needs 2 million to 4 million new housing units, but that the number grows as need outpaces production, with a lack of affordability now moving "well into what would be considered the middle class."

Turner said a federal subsidy to help spur more building conversions to housing, as well as incentives for local governments to retool land-use policies, would help chip away at the housing crisis.


The Department of Housing and Urban Development, or HUD, a government agency mandated to help spur affordable and low-income housing, has been supporting much less lending activity lately.

HUD faces an estimated 75% decrease in volume in the fiscal year 2024 from 2020, according to Jeffrey Weidell, chief executive at multifamily-focused Northmarq, testifying on behalf of the Mortgage Bankers Association.

"We haven't done a lot of HUD business," Weidell said, adding that the housing agency has become the "lender of last resort," and among the most expensive, inefficient places to originate an apartment loan.

He said HUD imposes "hidden, duplicative and unnecessarily high fees" on developers and providers of housing, including through application and closing fees, but also through mortgage-insurance premiums charged to borrowers. "These costs result in fewer units being developed and higher rents for tenants."

-Joy Wiltermuth

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.


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04-30-24 1915ET

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