Commercial real estate woes

The next shoe to drop in the real estate downturn? Commercial properties, which are seeing rising defaults on loans that were bundled together into commercial mortgage-backed securites, The Economist notes.

The housing market may be on the path to recovery at this point. But commercial property sales are way down because no one wants to sell at a loss. "Those owners are implicitly assuming that a rebound is imminent, yet the downturn may be prolonged," writes the magazine.

That's going to hurt banks, which are slow to write down property loans. The issue really won't be forced until the loans come due to be refinanced. And smaller, regional banks will be heavily impacted.

All of which creates more headaches for the government. Will it also rescue the smaller banks that will suffer huge losses on commercial real-estate loans? Smaller banks don't get the "too big to fail" excuse, but they can certainly plea that they are too critical to their community to fold.

In Japan, the price of land is still about 60% down from the peak hit in 1991, The Economist notes.

"The biggest danger may lie in refusing to acknowledge the scale of the problem. Some countries are awake to this: in Britain, where prices have fallen by nearly half in real terms, big property groups have raised equity to shore up their balance-sheets, and reduced prices are attracting foreign buyers to London. As the example of Japan shows, a short, sharp fall in prices is better than prolonged obfuscation and denial."

Image credit: ShakataGaNai, Creative Commons attribution share alike 3.0 

Related reading:

Commercial real estate time bomb

Commercial real estate drying up

Commercial real estate is next big problem for banks

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Comments

 

Denial is what America is about:

(1) You can be healthy by sitting on your fat Boomer b*tt and popping pills and going in for your cosmetic surgeries.

(2) Bankers can still get bonuses although their company is a ward of the state or if the bonuses actually EXCEED the the company's profit.

(3) People can think homes - something that is static and actually decays over time and generates no income - are good investments.

(4) We can sit here and not invest in our infrastructure, basic R&D, higher education or job training but we can be #1 in the world! (In what it is yet TBD, garbage collector perhaps?).

(5) We can fight expensive wars in the Middle East for it, we're out of domestic production in the next 20 years and the Chinese and Europeans are beating us on energy tech but, hey, we don't have to adapt to a different energy future.

Larry L (Posted 08.05.09 12:42 PM) Report Abuse

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