Main Street

Commercial Real Estate Crisis Coming

Economists are predicting that a coming wave of commercial real estate defaults will be the next problem facing the US economy. From imarketnews.com:

The coming wave of commercial real estate loan defaults will likely limit the flow of credit to small businesses and extend the “jobless recovery,” an economist with Grubb & Ellis Co told Market News International.

Bob Bach, chief economist for the firm, said, “The backlog of distressed loans is actually probably hindering the flow of credit to small business in this country and thus could serve to prolong the jobless recovery.”

From HuffPo: The Congressional Oversight Panel, the TARP watchdog group headed by Elizabeth Warren issued a report this week on the looming commercial real estate crisis:

Over the next five years, about $1.4 trillion in commercial real estate loans will reach the end of their terms and require new financing. Nearly half are “underwater,” meaning the borrower owes more than the property is worth. Commercial property values have fallen more than 40 percent nationally since their 2007 peak. Vacancy rates are up and rents are down, further driving down the value of these properties.

When the reckoning comes, it could threaten everyone from banks and pension funds to renters and small businesses — and small banks could be particularly vulnerable.

Warren warned against government inaction.

“When commercial properties fail, the result is a downward spiral of economic contraction; job losses; deteriorating store fronts, office buildings and apartments; and the failure of the banks serving those communities,” she said. “These are the same small banks that provide loans to the small businesses that create jobs and boost productivity. If hundreds more community banks go under the effect could be to dump sand in the gears of our economic recovery.

The whole report can be found at the panel’s website, which offers this warning:

The Panel found that “a significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American.” When commercial properties fail, it creates a downward spiral of economic contraction: job losses; deteriorating store fronts, office buildings and apartments; and the failure of the banks serving those communities. Because community banks play a critical role in financing the small businesses that could help the American economy create new jobs, their widespread failure could disrupt local communities, undermine the economic recovery and extend an already painful recession.

Elizabeth Warren is one of the strongest and sanest voices we have right now on the subject of the US economy. Let’s hope Washington is listening – because as we’ve learned, it’s easier to be proactive than it is to deal with cleaning up after the fact.

Tags: foreclosures