CRE Is DOA

I've been warning you guys about the commercial real estate collapse for quite some time now, and we're starting to see that collapse accelerate to the point where the news media is picking it up.

A commercial mortgage meltdown is likely to prolong the nation's economic recovery. The falling prices in commercial real estate will lead to additional bank losses at a time when banks are sapped by home mortgage defaults and soaring credit card defaults. This could lead to future additional taxpayer assistance for the banks.

The reality is already on display. On April 16, the nation's second largest mall developer, General Growth Properties, filed for bankruptcy protection. The Chicago-based company owns more than 200 malls across the U.S., and was unable to renegotiate its debts as they came due.

Six days later, a 40-story office tower on New York's Avenue of the Americas was seized by its creditor, a Canadian-owned pension fund. The tower's owner, Macklowe Properties, couldn't meet loan terms.

"On the street, the rumor is it is coming and it's going to come fast and furious. Some people are predicting September," said Paul Waters, a New York-based executive vice president of brokerage operations in North America for NAI Global, a top-five commercial real estate brokerage with operations across the globe.

Just like the housing meltdown, the commercial real estate crunch is likely to begin as a slow bleed that gains momentum. The coming commercial real-estate crunch is likely to be spread evenly across the nation, in large part because of an outgoing economic tide that's spared few companies anywhere.

"There's going to be a lot of trouble on Main Street with some of these commercial and industrial buildings. The biggest impact will be on some of the smaller owners," Waters said. "The smaller local regional players that are stretched thin may have some great difficulties with their mortgages."

Wheels within wheels, death spirals within death spirals. This will only assure there will be no recovery in 2009 and there may very well be no recovery in 2010 either.

Don't be fooled by the quick recovery happy talk. It's not going to happen. It will continue to get worse. Just because the rate of your fall out of the airplane has hit terminal velocity doesn't mean you stop falling.