Commercial Real-Estate Ruin: No New Lease on Trillions in Debt
By - May 25, 2009

A trillion-dollar storm is gathering over the commercial real estate landscape that's threatening to add further pain to an already bruised US economy. At the center of the worries is some $3.5 trillion in debt backed by everything from strip malls to offices and apartments across the nation — the lion's share of which is badly underwater because this recession followed a five-year commercial property boom fueled by easy money and loose underwriting standards. Now the owners of the less-than-full malls, apartment complexes and office buildings are succumbing to the worst economic collapse since the Great Depression — because they can't refinance the debt. The commercial debt securitization market is dead. – NY Post

Dominant Social Theme: Green shoots need to grow fast.

Free-Market Analysis: For anyone watching the unfolding economic crisis and using the mainstream media narrative, the timeline is fraught with surprises and even helplessness. There is a "virus" in the economy, so it is said, and it's "spreading" – according to such sources as AP (see previous Bell). The financial crisis is both mysterious and sudden, we're told. And we're left to wonder how the West could be doing so well one year and so badly the next. The problems just keep on coming.

So try another paradigm. Take a peek at free-market economics. (Is there any other kind, a famous economist asks us.) According to free-market economics, any interference with the invisible hand will have unexpected consequences. For any action, therefore, there is bound to be a reaction. Price fixing always creates a queue, scarcity or higher prices, usually at the same time. Central banking is price fixing, pure and simple. When you fix the price of your money stuff, you create tremendous booms and then busts, such as the one we are living through.

Yes, indeed, central banking creates mal-investments and these mal-investments pile up until there is a sudden crash and all the bad investments are revealed to be the souring speculations they really are. After the fact, everyone points to this regulation and that regulatory action, proclaiming these were the proximate cause. But it's money printing. It is the printing press that does the main damage, not the regulatory process, after-the-fact, once the bubble has formed. (No bubble, no trouble?)

So why should it come as a surprise that there is a commercial real estate crash lurking in the near-future. Why should commercial real estate be exempt from the ravages of the mal-investment that has affected home mortgages in America and overseas? Short answer: the commercial market is not exempt. The same mal-investment that fooled home mortgage buyers and sellers fooled the savviest of real-estate pros.

A virus has nothing to do with it. What is going on is not a random or mysterious process. It's logical and predictable. If you follow free-market economics, you can predict it, too (we have and we are anything but geniuses). However, you won't understand if you just follow mainstream media repo rts: those that explain but never analyze; offer incredibly detailed analysis but no insight. Speaking of which … here's some more from the NY Post article excerpted above:

"Because there is no securitization the system cannot process the wave of maturities coming due," said Scott Latham, commercial property broker at Cushman & Wakefield. "This is arguably the most important fact we're going to be dealing with. If there's no mortgage market that can feed the machine you're just not going to have deals," he said. "It's going to be years before we recover and even when that happens we're going to discover that we're in a new paradigm," Latham added. About $1.4 trillion in real estate debt is set to mature over the next four years, with some $204 billion coming due this year alone. Most of that debt won't be able to be refinanced or restructured because lending standards have tightened and commercial real estate values have cratered since last year, according to Deutsche Bank analyst Richard Parkus.

Interestingly, one of the problems afflicting the commercial mortgage market is tightening lending standards. Even as legislators in the United States and overseas agitate for more lending, central bankers are demanding more stringency from commercial and regional banks. And additional regulations are passing that will make restarting the private sector through bank loans even more problematic. Regulation may not cause the disaster but it can make things worse. And it will.

After Thoughts

If banks really want to lend, of course, they will find a way. But bankers don't seem to want to lend currently because they are not sure of the return. This has nothing to do with the real-estate crisis particularly and a great deal to do, probably, with derivatives. Banks are likely still afraid of their own derivatives exposure and they are afraid of counterparty exposure, were they to initiate additional lending. This is also predictable, given the amount of mal-investment yet to be unwound. And it could go on for years. It is probably why countries that have a historical gold-bias – such as China – are buying gold on a nearly frantic basis. And why so many individuals are seeing the benefits of honest money to their portfolios even now.

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