Commercial Property Fears Are Overblown: Zell, LeFrak
Commercial property is facing a tough time, but reports that it is likely to collapse and trigger a second round of the recession are exaggerated, three billionaire investors told CNBC Tuesday.
"I just don't believe that's the case," Sam Zell, chairman of Equity Group Investment, said about speculation that commercial real estate represents the second leg down of the financial crisis which hit the world two years ago.
"We haven't had a new real estate asset of any significance committed since July 2007," Zell said, adding that it may take another 24 to 36 months before a major project is committed.
Prices for commercial real estate have already fallen by about 40 percent, but the problem is that lots of owners are in negative equity now, said Richard LeFrak, president of the LeFrak Organization.
Owners don't sell because "the bottom line is there's more debt than there's value," Zell added.
However, debt makes up about 80 or 90 percent of commercial real estate projects in the US and because of the recession, unemployed people "need little retail space," Wilbur Ross, chairman and CEO of WL Ross & Co., said.
"I think it's going to be a long, hard struggle even without new construction," Ross said. "I think it is going to be tragic for the equity owners and for some of the lenders."
Typical regional banks in the US would have 25 percent of their assets in commercial property loans. "I think the biggest victims are going to be the regional banks," he added.
Malls are also likely to suffer, as "the new norm is that nobody goes shopping, everybody is saving," LeFrak said, adding that mall vacancy rates run at about 11-12 percent.
The worst-hit areas will be the ones to recover first, Zell said.
"I think that probably the most severe slowdown has been in office real estate and I'd suspect that probably that would be the first to recover," he said.
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