Thread: If You Thought the Housing Meltdown Was Bad…

If You Thought the Housing Meltdown Was Bad…

November 14th, 2009

By Doug Hornig, Senior Editor, Casey Research

…wait until you see what’s in the cards for commercial real estate.

That’s right, the next train wreck will be in commercial real estate. Couldn’t be worse than last year’s residential market crash? That remains to be seen. But it’s coming soon, probably as early as the second quarter of next year, and there’s nothing that can prevent it. The government will intervene, trying desperately to delay the day of reckoning, and may even succeed. For a while. But make no mistake about it, that train is going off the tracks no matter what.

Every part of the sector – from multifamily apartment buildings to retail shopping centers, suburban office buildings, industrial facilities, and hotels – has accumulated a huge amount of defaulted or nonperforming paper. It’s an impossible, swaying structure that cannot long stand.

Just ask Andy Miller.

Andy is one of the most knowledgeable people around when it comes to commercial real estate. Co-founder of the Miller Fishman Group of Denver, he has spent twenty years buying and developing apartment communities, shopping centers, office buildings, and warehouses throughout the country. He’s also worked extensively – especially lately – with asset managers and special servicers (those who handle commercial mortgage-backed securities, or CMBS) from insurance companies, conduits, and the biggest banks in the U.S., advising them on default scenarios, helping them develop realistic pricing structures, and making hold or sell recommendations.

It isn’t easy. Commercial real estate sales are off a staggering 82% in 2009, compared with 2008, and last year was worse than ’07. No one is selling at depressed prices, but it hardly matters as there are no buyers, either because they’re afraid of the market or can’t meet more stringent loan requirements. Two years ago, the value of all commercial real estate in the U.S. was about $6.5 trillion. Against that was laid $3-3.5 trillion in loans. The latter figure hasn’t changed much. But the former has sunk like a bar of lead in the lake, so that now between half and two-thirds of those loans will have to be written down, Andy estimates.

“If the banks had to take that hit all at once, there wouldn’t be any banks,â€

Let the banks fail and the American people succeed.

My uncle and I have been discussing this exact same issue for the last 10 months. Because it's like a domino effect with realestate. Once the private dwelling side goes, it's only a matter of time before the commercial side suffers. This of course depends on how bad the private side goes. If it's light, the commercial side can usually ride out a slight upset, but when it is to the degree that it is now, then even the commercial realestate will suffer. If there isn't any money to keep the economy going, it tends to collapse in on itself.

Congressman Louis T. McFadden of Pennsylvania back in the 1930's understood this, and who was behind it.

You can read what he concluded, and said on the floor of the House of Representatives, after being the head of the House Banking and Currency Comittee here:

http://home.hiwaay.net/~becraft/mcfadden.html

He created many waves from what he found out, and in my opinion was silenced for it, as he was quite militant on the subject, and who was responsible for it.