The Next Tsunami

I've been talking about the coming commercial real estate disaster for some time now. It's no longer "coming" but very much here now.(emphasis me)

Cleveland and Detroit lead the U.S. in commercial mortgage delinquencies, a sign the housing crisis that brought down Wall Street is spreading beyond the residential market.

Office, retail, apartment and industrial properties with mortgage payments 60 days late or more rose to 3.93 percent as of March in the Cleveland area and to 3.75 percent in the Detroit area, according to data compiled by Bloomberg. The North American commercial property delinquency rate is 1.1 percent, according to Standard & Poor’s.

“There is really no part of the country being spared,” said Robert Bach, chief economist at Santa Ana, California-based broker Grubb & Ellis Co. “Cleveland and Detroit are just the first to feel the stress. They’re the canaries in the coal mine.”

The second year of the U.S. recession is reducing demand for commercial real estate after prices hit a record in 2007. The slump in housing and rising unemployment will probably take a toll on retail and office landlords, Bach said.

Loans secured by properties that were written assuming rental growth have been unable to meet targets, leading to increased defaults. The delinquency rate for North American commercial real estate loans in mortgage backed securities may triple in 2009 as loans default, Standard & Poor’s credit analyst Eric Thompson said in a Feb. 17 statement.

Circuit City left behind 18 million square feet of empty retail space when it closed its doors for good yesterday, not to mention another 34,000 jobs lost. That will be repeated in empty malls, vacant strip storefronts, unused offices and hotels across the country at the retail-driven consumer economy grinds to a halt.

Space for rent signs will be popping up like weeds as the commercial real estate crashes and stores fold. Entire malls will go under as enough shops close to make the rest of the mall unprofitable as empty space goes unused. Millions of jobs will be lost as the retail sector disintegrates, causing more stores to close, etc.

In other words, the next stage of the recession/depression is upon us now. 10% U-3 and 20% U-6 by the end of the year are very, very conservative estimates.