But it seems Ross and Soros are just realizing this.
Ross sees a "huge crash in commercial real estate coming" and Soros spoke of a "bloodletting yet to come." Makes you wonder how these guys became so filthy rich when they can’t see what’s happening.
"In commercial real estate and leveraged buyouts, the bloodletting is yet to come," Soros said. "These factors will continue to weigh on the American economy, and the American consumer will no longer be able to serve as the motor for the world economy."
That’s interesting, Soros… because the bloodletting started a long time ago.
There have been bankruptcies, bank failures, foreclosures, destroyed property values, and so on and so forth. And there’s more pain to come for commercial real estate and the greater economy. I don’t care what Geithner would have you believe about the economy’s ability to handle any CRE hits it takes.
But I digress…
Here’s what we reiterated in early September, months after the collapse already began:
Without a doubt, this problem has emerged as the biggest threat to our economic rebound and banks (especially regional banks, which hold more than $1 trillion of mortgages backed by CRE that is quickly losing value).
The sector will suffer from two things, one of which is bad underwriting. CMBS owners were lent money on the assumption that occupancy and rents would keep rising. But that never happened. The opposite did. "The result is that a growing number of properties aren’t generating enough cash to make principal and interest payments."
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.
"Federal Reserve and Treasury officials are scrambling to prevent the commercial real estate sector from delivering a roundhouse punch to the U.S. economy just as it struggles to get up off the mat," said a recent Wall Street Journal article. But "their efforts could be undermined by a surge in foreclosures of commercial property carrying mortgages that were packaged and sold by Wall Street as bonds."
And, according to Deutsche Bank AG, "as property value declines and scarce credit continue to drive commercial property developers and investors into default, total lifetime losses on banks’ $1 trillion "core" commercial-mortgage holdings, or those backed by income-producing properties, would reach between 11.6% and 15.3%, or $115 billion and $150 billion."
"So far, banks in general have been reluctant to take losses on their commercial books," says the Wall Street Journal. "This "delay and pray" strategy is preventing most banks from issuing new loans as they prepare their balance sheets for potential future losses…"
It’s bad… real bad. But there are ways to profit from the coming disaster… which you can check out in Options Trading Pit.