Commercial Real Estate's
Coming $1.4 Trillion Crisis

By: Lita Epstein, Lingling Wei and Jennifer Liberto

 

The economic crisis is growing despite the best efforts by America's mainline press to cover-over the severity of what's been happening. So far, the government has been able to hide the worst affects of the economic downturn, at least insofar as those who have not yet lost their jobs or who are now "underemployed" and have been left "scratching" like a barnyard chicken on barren ground for a living - about 20% of the population. But when this crisis finally hits the COMMERCIAL REAL ESTATE MARKET everyone will have to take note of what's occurring because it will reach right down to the neighborhood mall, the 20th and 21st centuries equivalent of "Main Street USA" where people go to meet other people and relax; but all they will find is empty parking lots and vacant stores.

Lita Epstein, an expert in commercial real estate, writes:

"In a report released Thursday, the Congressional Oversight Panel sounded the alarm bell about a potential crisis involving $1.4 trillion in commercial real estate loans that will come due between now and 2014. The panel warns that this new real estate crisis will have a devastating impact on LOCAL COMMUNITIES AND SMALL BUSINESSES which is precisely where 'rubber meets the road' insofar as most Americans are concerned.

"It is feared that when these loans come due, companies will be unable to repay or refinance them because of deteriorating conditions in the commercial real estate market. Most of these loans were made at the top of the real estate bubble in 2007 AND HAVE LOST AS MUCH AS 40% OF THEIR VALUE. Nearly half are underwater -- the properties are worth less than the balance of their loans."

Epstein concludes:

"The panel's warning shouldn't come as a surprise. As early as May 2009, ANALYSTIS WARNED THAT FAILURES OF COMMERCIAL REAL ESTATE LOANS COULD MEAN TROUBLE FOR HUNDREDS AND HUNDREDS OF SMALL BANKS, WITH THE POTENTIAL FOR A HUGE NUMBER OF BANK CLOSURES IN THE NEXT FIVE YEARS."

Lingling Wei of the Wall Street Journal reports on the impact all this could have on "Main Street USA:"

"In contrast to home loans the majority of which were made by only 10 or so giant institutions thousands of small and regional banks loaded up on commercial property debt. As a result, commercial real estate troubles would be even more widespread among the financial system than the housing woes. At the present, more than 3,000 banks and savings institutions have more than 300% of their risk-based capital in commercial real-estate loans."

Expanding on what Epstein and Wei had to say, Jennifer Liberto of CNNMONEY.com writes:

"The expected losses when these loans go bad could THREATEN AS MANY AS 3,000 SMALL AND MID-SIZE BANKS with a disproportionate share of commercial real estate assets on their books, according to the panel.

"The report is intended to 'wave a red flag' to the White House and Congress that the commercial real estate loan market is going to get a lot worse ...

"The panel's research found that 2,988 banks are heavily invested -- with more than three times their assets tied up -- in commercial real estate loans. Of that number, 2,500 banks each have less than $1 billion in assets.

"Indeed, many such smaller banks have already failed. Small bank failures 'will intensify sharply over the next few years', Warren said."

A sign of things to come: An empty Mall

Warren writes that when these commercial properties fail, it will create a downward spiral of economic contraction, job losses and deteriorating store fronts, office buildings and apartments. This will lead to the failure of banks serving those communities. And since local banks play a critical role in financing the small businesses that create a large percentage of the U.S. economy's new jobs, their widespread failure could disrupt communities and undermine the economic recovery.

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