Commercial Real Estate the Next Shoe to Drop

by Howard Bell
Commercial property markets are beginning to show real weakness.
NosediveDelinquency rates have doubled to almost 7% and the bottom isn’t expected for another three years.
It no surprise that with the loss of jobs there is a great deal of downsizing and rent reduction for everyone from retail shopping malls and small business to hotels and offices.

Unemployment is now 9.5%, pushing commercial vacancy rates to 17%. The Globe and Mail reports real estate experts and regulators warned a U.S. congressional committee that commercial real estate is headed for a crash that could eclipse the slump of the early 1990s, saddling already hobbled banks with a new wave of bad loans.

Big Debts Due

Almost $1.8-trillion of commercial loans made during good times will roll over by 2012 (see chart here). The banks are certainly reluctant to take on more high risk property. The Fed certainly doesn’t want the banks to assume more risk at this juncture. Office towers and shopping centers are already down 35 to 45% since 2007. That compares with a 32% peak-to-trough decline for house prices, according to the Case-Shiller home price index.


The commercial real state crisis is not only important for banks, which hold almost $2-trillion of commercial loans. The commercial real estate industry also provides more than 9 million jobs and generates roughly 70 cents out of every dollar in local government budgets. The Obama administration has a $1-trillion Term Asset-Backed Securities Loan Facility (TALF) program in place.

Because there is no secondary market for commercial mortgages, TALF will inject big dollars into a non existent market to provide liquidity and encourage lenders and investors to participate in commercial real estate loans. TALF is expected to help unfreeze credit markets that limited refinancing billions in commercial real estate debt that resulted in a wave of defaults. At the core, this is a crisis caused by a credit collapse.

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Howard Bell PFP CCRM is the founder/editor of Your Property, featuring over 450 articles on property management, Your Property Path SF, trade talk for the San Francisco real estate industry, Your Property Path News Brief, snap news updates and real estate market info, and Your Property Path Amazon Store. Howard is a property manager in San Francisco and holds a certification in financial planning.

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