What has been lost in the housing talk recovery is the grim statistics that commercial real estate has fallen 37 percent in value in the last year. This wouldn’t be such a big problem aside from the tiny detail that some $3 trillion in commercial real estate loans are still outstanding. The commercial real estate debacle is already happening with defaults reaching 16 year highs. This is already occurring before many of the commercial real estate loans reach their refinance dates. In some instances banks are simply ignoring non-payment and giving borrowers a few more months or even years. Why? Because they can still claim the note is current and claim the asset at inflated values.
Yet this is a game we are all familiar with. Suspending mark to market has always been a method for the U.S. Treasury and Federal Reserve to skirt any real accounting from Wall Street. If we look at the current FDIC insured bank balance sheet, we can see that many more problems lie ahead for commercial real estate:
Of the $3 trillion in CRE loans $1.3 trillion is directly with commercial and industrial loans. These are loans for retail properties but also for businesses. Well with few employers hiring and people cutting back it is clear that many businesses will have very little need in expanding in the next few years. Another $535 billion is in construction and development loans and many of these are in horrible shape. CRE projects take years from start to finish. Can you imagine how many CRE projects took off in 2006 and 2007 at the peak of the bubble only to go live in 2009 and 2010? It is a case of the worst timing in the world.
We are entering a phase where commercial loans will need to be refinanced for nearly a decade:
Source: Zero Hedge
In reality, the CRE implosion is going to take down hundreds of banks in the next few years. Residential lending became a key part of the too big to fail banking model and smaller regional banks simply were unable to keep up. So instead they funded local CRE projects that are now ticking financial bombs on the balance sheet of hundreds of banks.
We’ve discussed before that 70 percent of the banking assets sit with approximately 100 banks. So 7,900 banks can fail and the bulk of the system is intact. That is the dictionary definition of too big to fail. With so many people out of work and companies not hiring, how will borrowers pay back the CRE loans?
Commercial real estate is a big game and much of the problems are yet to come:
Source: McClatchy
This is an enormous market and people are going to be less agreeable to a commercial real estate bailout especially with bailout fatigue setting in. The U.S. Treasury has already planned a preemptive bailout for the industry with Plan C but much of this has been stuffed deep into page 10 of the mainstream media reporting.
How quickly are things spiraling out of control? Exponentially:
Source: MBA
So gear up. It looks like 2010 is going to be another banner year for bailouts.
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