Who is to Blame for the Commercial Real Estate Disaster?

Over at Clusterstock, John Carney takes a look at the CRE mess, and assigns lots of blame to lots of people, government agencies, central banks and investors.

He did a yeoman’s job on this overview. I cannot say I am on board with everything he trashes, but he gets a lot more right than wrong. Note especially his pointed commentary about the Fed, how CMBS were allowed such light weight reserve requirements, and the rise of regional and community banks in riskier CRE activities.

The gross data points he cites are horrific:

“Commercial real estate prices have fallen 33% this year and 45% from their peak. Greater than 55% of commercial mortgages are underwater. Some analysts say that as many as 2/3 of the loans may be underwater.

As many as 65 percent of commercial mortgages maturing over the next few years will not be able to qualify for refinancing because of the drop in the value of the underlying property.”

Its worth checking out (despite the obvious click whoring!):

“In a pattern familiar from the housing crisis, the value of commercial real estate has been plunging while the volume of distressed commercial real-estate loans is rapidly rising. The problems in commercial real estate could slam financial institutions, especially smaller regional and community banks, with billions of dollars in new losses. That, in turn, could snuff out whatever chances we have of a sustained economic recovery.

In some ways, this shoe has already dropped.

• The MIT Real Estate Center said that commercial property prices has dropped almost 42% over the past 2 years.
• As a result of that drop, about fifty-five percent the $1.4 trillion commercial mortgages that will mature in the next five years are underwater.
• The delinquency rate for commercial mortgages climbed to 5% in October. A year ago the delinquency rate was just 0.77%.
• About half of all commercial mortgages sit on the balance sheets of smaller banks. So the massive number of bank failures this year is significantly attributable to losses from commercial real estate.
• Late last month, one of the largest commercial real estate finance companies in the world filed for bankruptcy.

It’s only natural that you’re asking how the hell we wound up in this mess. Why did a bubble inflate in commercial real estate? Why are smaller banks so disproportionately exposed? What caused this catastrophe?

Good stuff . . .”


How A Government Bailout Created Today’s Commercial Real Estate Catastrophe
John Carney
Business Insider, Nov. 16, 2009

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