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Commercial Real Estate Meltdown

Written By Brian Hicks

Posted August 1, 2009

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).

Says Yellen:

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.

Good Investing,

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:

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