Well. . . better late than never.
Sure, the Dow broke out, catapulting stocks from the summer doldrums. . . but what those with short attention spans forgot is the other side of the "hurricane-like" storm wall: commercial real estate.
Everyone’s coming out, claiming there’s an end to the recession. . . that we’re having a "V" shaped recovery. . . but they’re about to get walloped.
Yep, it’s time to get out of the water, folks. . . and fast (just as Steve and I have been warning readers).
Heck, Bernanke. . . even Janet Yellen, president of the San Francisco Fed, are nervous wrecks over it.
That’s because they know that $2.2 trillion of U.S. commercial properties bought or refinanced since 2004 are worth less than original prices. They also know that prices have fallen so much that about $1.3 trillion of properties either lost down payments or are close to losing it.
And that just includes office, industrial, multi-family, and retail properties. Tack on hotels, and you can add billions more to those figures.
Without a doubt, this problem has emerged as the biggest threat to our economic rebound and banks (especially regional banks).
The next area of significant vulnerability for the banking system, particularly for community and regional banks with real estate concentrations, is income-producing office, warehouse and retail commercial property. . . Our biggest concern now is with maturing loans on depreciated commercial properties.
Borrowers seeking to refinance will be expected to provide additional equity and to have underwriting and pricing adjusted to reflect current market conditions. In some cases, borrowers won’t have the resources to refinance the loans.
Over the next five months alone, troubled U.S. commercial real estate loans could double to $100 billion, as delinquencies rise and financing remains tough to secure.
The next crisis that’s just now in the first innings of a disaster is commercial real estate — a $6.7 trillion market supported by $3.5 trillion in debt. And it’s best to get out of its way now. . . with short positions for protection.
As this story unfolds, it’ll read much like Part 2 of the residential market debacle.
And with values sinking, vacancies soaring, and a recession making it unlikely for us to see demand pick up, banks aren’t exactly jumping up to refinance deals.
Even Steve Christ will tell you that all of this is a recipe for disaster. . . and that industry leaders have estimated that 200,000 businesses and 10 percent of the nation’s shopping malls will close their doors over the next year.
That means that we’re maybe only in the second inning here as this crisis unfolds.
So, with roughly $530 billion in commercial mortgages coming due for refinancing in 2009-2011, and some estimates showing that as many as 68% of loans maturing during that time will fail to qualify for refinancing, you have to wonder how it will all get done, says Steve.
The brutal answer: it won’t.
For more on this and the Option ARM "time bomb," click here.
Ian L. Cooper
P.S. In case you’ve missed any of the recent top stories from Wealth Daily and our sister publications, we’ve included them here:
U.S. Economic Outlook: Nine Roadblocks for the Rally
Before the bulls break out the champagne here, I would warn them not to get too far ahead of themselves. After all, euphoria is a dangerous emotion that can lead to big losses — in this market, or in any other, for that matter.
Underwater Borrowers Shift the Wealth Effect into Reverse: The Housing ATM Shuts Down for Good
During the heydays of the mortgage bubble, rising asset prices were all it took to get consumers to spend themselves deeper and deeper into debt. However, the reverse is actually true these days.
The Truth About New Home Sales: Nothing but Spin
With the bulls desperate to keep pumping up the stock market, spin has been refined to a fine art. Even in the faintest of glimmers they can somehow plot a return to new heights.
The Commercial Real Estate Decline is Accelerating
According to Moody’s, commercial real estate values around the country have dropped 35 percent from their peak in October 2007. But that’s just the beginning. . . the decline appears to be accelerating. In fact, values have dropped by more than 15 percent in the months of April and May.
U.S. Economic Bubbles: Three Sectors Ready to Swan Dive
It’s every investor’s dream — buy into a theme before any one else has caught on. . . ride it all the way up until it gets bubbly. . . and sell to the suckers who bought at the top. It’s like buying housing names in 2004 (as we did), only to sell and go short in 2007 (as we did). . . or oil prior to the rise to $147 (again, as we did). . . or even dot-coms before the bubble burst.
Corporate Sustainability: Following the Easy Green Money Trail
What happens when the biggest retail, technology, and software giants ‘go green?’ For starters, it brings validation to an entire industry that, until recently, was marginalized and demeaned while inaccurately being touted as bad for big business. "It costs too much," was the argument. . . "This’ll never catch on," was the argument. . . "It’s not even necessary," was, perhaps, a worse argument.
India Solar Power: India To Generate 20 GW Of Solar By 2020
In an effort to kickstart its plan to fight global warming, India will soon unveil a solar initiative that will boost solar power output to 20 gigawatts by 2020. This is certainly a lofty goal, considering India currently has only about 3 megawatts of installed capacity.
Natural Gas Price Forecast: The Future of Natural Gas: It’s Time To Invest
The market rarely provides buying opportunities where the risk to value proposition is extremely disconnected, but the natural gas market is having one of those moments now.