Life After Debt: Coming to Grips with the Funding Gap PREI(R) report estimates commercial real estate funding gap is between $610 billion and $825 billion

PARSIPPANY, N.J., Oct 30, 2009 (BUSINESS WIRE) -- As much as $825 billion in capital could be required to fill a commercial real estate debt funding gap in the United States over the coming years, according to new research from Prudential Real Estate Investors. This capital gap provides a historic opportunity for investors. PREI(R) is the real estate investment management and advisory business of Prudential Financial, Inc. (NYSE: PRU).

"Aggressive lending and valuations during 2005 to 2008 resulted in a large body of commercial properties that will very likely not qualify for mortgages sufficient to pay off existing debt," said Jack Taylor, managing director and head of PREI's global high yield debt platform. The banks and securitization programs, the most aggressive providers of commercial real estate debt then, originated $2.3 trillion of loans during that period. With Wall Street securitization programs largely dismantled and bank lenders severely constrained by legacy balance sheets, the demand for mortgage debt will greatly exceed supply. "We believe that a large of amount of capital will need to be injected into the system, over an extended period of time, to make up for this shortfall, and this is in addition to the approximately $1.5 trillion of new first mortgage debt that will be required," added Taylor.

Debt shortfalls have already created distress in the market and the problem is in its early stages. For now, lenders are extending maturing loans but as the large volume of loans continues to mature, many property owners will not qualify for mortgages sufficient to pay off existing debt, even if they can make debt-service payments, leaving a funding gap of between $610 billion to $825 billion. That means borrowers will need a combination of fresh equity, subordinate debt and debt forgiveness.

In PREI's report, Life After Debt: Coming to Grips with the Funding Gap, the company factored in lower property values and more conservative lending to develop the estimate. Eliminating construction and land loans from these calculations, many of which may be substantially written off by lenders, the total shortfall would be revised to between $390 and $520 billion, with a first mortgage debt need estimated at approximately $1.1 trillion. Further, even if lenders write off a substantial amount of this debt as unrecoverable, the net gap could still exceed $300 billion. The funding gap is defined as the difference between the size of existing mortgages and the proceeds those properties will likely qualify for when refinanced.

The full report and additional perspectives on global real estate trends are available on Prudential's newsroom.

PREI is a leader in the global real estate investment management business, offering a broad range of investment vehicles that invest in private and public market opportunities in the United States, Europe, Asia, and Latin America.

Headquartered in Parsippany, N.J., PREI has offices in Atlanta, Chicago, New York, San Francisco, Miami, London, Lisbon, Madrid, Milan, Munich, Paris, Luxembourg, Istanbul, Singapore, Mexico City, Rio de Janeiro, Hong Kong and Tokyo. As of June 30, 2009 PREI managed $44.3 billion gross ($24.4 net) assets under management on behalf of over 490 clients worldwide and ranks among the largest real estate investment managers. For more information, please visit http://www.prei.com.

Prudential Financial, Inc. (NYSE: PRU), a financial services leader with approximately $580 billion of assets under management as of June 30, 2009, has operations in the United States, Asia, Europe, and Latin America. Leveraging its heritage of life insurance and asset management expertise, Prudential is focused on helping approximately 50 million individual and institutional customers grow and protect their wealth. The company's well-known Rock symbol is an icon of strength, stability, expertise and innovation that has stood the test of time.

Prudential's businesses offer a variety of products and services, including life insurance, annuities, retirement-related services, mutual funds, investment management, and real estate services. For more information, please visit http://www.news.prudential.com/.

SOURCE: Prudential Financial, Inc.

CONTACT: Prudential Financial, Inc. Lisa Iurato, 973-802-5345 [e-mail] Copyright Business Wire 2009 -0- KEYWORD: United States

North America

New Jersey INDUSTRY KEYWORD: REIT

Construction & Property

Commercial Building & Real Estate SUBJECT CODE: Product/Service