Don't Look Now But, A Commerical Real Estate Collapse Is Next
Do you really need another indicator of how much trouble the economy is in? Well, brace yourself for the coming commercial real estate collapse.
Some experts expect that the coming commercial real estate collapse may exceed the one in the early 1990s, when bad commercial property debt played a big role in dragging the economy into a recession. At that time, close to 1,000 US banks and savings institutions failed.
The reason why the commercial real estate market is in trouble is a lack of demand, which is caused by surging unemployment rates, rising home foreclosures and increasing defaults on commercial loans that were packaged in such a way which included an increase in future rental rates and revenue.
As companies hammered by the bad economy laid off workers, scaled-back or canceled plans to expand and put off new investments in office space, rents fell in demand for newly constructed the buildings evaporate. Some companies who borrowed to build or buy commercial real estate may find it hard to pay back that debt now.
The banks are holding billions of dollars in commercial mortgage-related investments. As the commercial real estate market tanks, banks hoarding the securities could be forced to take big write-downs and some of the biggest financial institutions have huge, potentially troublesome commercial real estate holdings.
Market fundamentals have weakened as a lack of capital and a lack of confidence has forced investors and corporate tenants to the sidelines.
A good indicator of what lies ahead for commercial real estate is status of the commercial real estate market in Cleveland and Detroit. These two metropolitan areas lead the country in mortgage delinquencies for owners of office buildings, apartments, malls and warehouses. The next areas expected to be hit hard are the ones that took a bath in the housing real estate market. Some of these cities include Las Vegas, Phoenix, parts of Florida and the Riverside-San Bernardino (Inland Empire) area.
Sources for this article include The Business Insider, WSJ.com, Bloomberg, CB Richard Ellis, Commercial Mortgage Alert, Standard & Poors and Fitch Ratings.