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"Commercial Real Eestate: Tick... tick... BOOM! - The Market Ticker


Washington can sing Kum Ba Yah all they want .... but this is one bubble that's about to pop, tanking more banks as it goes.  More bailouts  .........


"Commercial Real Eestate: Tick... tick... BOOM! - The Market Ticker
....... "The overcapacity problem is extraordinarily severe.  Regional banks are up to their necks in this paper, and its performance is becoming worse by the day.  "FOR LEASE" signs have sprouted like mushrooms, and this will continue.
The unfortunate reality is that a lot of these developments cannot possibly ever perform as originally structured, as the cap rates are off with reality to a degree that is impossible to reconcile.  These buildings and malls will never be profitable outside of "huge bubble" conditions, and those are not coming back!
To make it worse the customary financing for commercial real estate, unlike many home mortgages, does not wind up with a clean title.  Instead it is more of a "rolling cash flow" scheme where loans are refunded every few years and the owner of the property earns out construction and interest cost on the spread.  The problem with this sort of financing is that it relies on ever-improving (or at least stable) business conditions in order to remain stable in the marketplace; a downturn of any severity kills you dead by either killing your cash flow or putting you into a situation where you can't roll the paper at the appointed time at anything approaching a reasonable set of terms.
I fully expect commerical real estate to be at least as bad in terms of severity as residential and it may be worse due to the insane leverage that is usually employed.  This will destroy many regional banks (it already has figured prominently in almost all of the bank failures thus far) and anyone who thinks that we will "come out of recession" while there is quite literally another $2-3 trillion worth of bad commercial real estate deals on the books that cannot be refinanced or cleared is simply out of their minds......."
Entry #1,267


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