Is Commercial Real Estate About to Crash?
On January 21, 2010 I said that a commercial real estate crash was coming. I was wrong...at least my timing was wrong.
Falling real estate values and falling income - as I said at the time - mean that commercial real estate owners won't be able to meet their mortgage obligations. That part was right. But when I said to expect a crash in 2010, I didn't anticipate the "delay and pray" tactics the banks - with government complicity - would employ to push off the day of reckoning.
There's an excellent analysis in Zerohedge of exactly what sort of tactics were employed. The author, Jim Quinn, believes that we're at the end of the road now. He doesn't think the reckoning can be put off any more and sees 2012 and 2013 as the years when commercial real estate crashes. And he makes a compelling argument.
The thing to remember, though, is that much of our banking and financial system depends on this "pray and delay" approach. We may be in a real "do or die" situation where whatever can be done to delay the payment of this debt - like the payment of a lot of other debt out there - has to be delayed "or else."
It's kind of like the Greek sovereign debt situation. The recent bailout of Greece was concocted by the European Central Bank to delay the obligation of the Greek government to meet its obligations. The thing is, the Greek government will still not be able to pay the interest rate due on its debt. The ECB is just pushing out the day of reckoning.
(And forget about the principal being paid back. The recent bailout already cut the principal over 50% - and still there's no way even that will ever be paid back.)
This "delay and pray" tactic may be able to be extended a lot longer than any of us think. Then again, maybe it won't be able to be extended. Frankly, I have no idea.
My best guess is that commercial real estate may go as this author claims. For one thing, the creditors (banks) who loaned this money have been forced to list the debt at current market value - something they didn't have to do in 2010. So if they've been forced to accept "reality" on their books, then maybe the inevitable defaults will be "allowed" to occur. (The defaults have to occur at some point, because borrowers don't have enough cash flow to pay the interest due - see my original post and/or the Jim Quinn article.
Then again, when the day of reckoning finally arrives for commercial real estate and all this finally gets sorted out, the commercial real estate market will return to health. Normal commerce will resume.
Alas, the same can't be said for government debt (Greece, Italy, Spain, USA...you name it). We can anticipate far more can kicking - or as Jim Quinn calls it "delay and pray" - from governments. Their situation is far worse and far more hopeless than the situation in commercial real estate.
A commercial real estate crash is one thing. Governments possibly collapsing under the weight of their growing debt will be something else - to put it mildly.
Falling real estate values and falling income - as I said at the time - mean that commercial real estate owners won't be able to meet their mortgage obligations. That part was right. But when I said to expect a crash in 2010, I didn't anticipate the "delay and pray" tactics the banks - with government complicity - would employ to push off the day of reckoning.
There's an excellent analysis in Zerohedge of exactly what sort of tactics were employed. The author, Jim Quinn, believes that we're at the end of the road now. He doesn't think the reckoning can be put off any more and sees 2012 and 2013 as the years when commercial real estate crashes. And he makes a compelling argument.
The thing to remember, though, is that much of our banking and financial system depends on this "pray and delay" approach. We may be in a real "do or die" situation where whatever can be done to delay the payment of this debt - like the payment of a lot of other debt out there - has to be delayed "or else."
It's kind of like the Greek sovereign debt situation. The recent bailout of Greece was concocted by the European Central Bank to delay the obligation of the Greek government to meet its obligations. The thing is, the Greek government will still not be able to pay the interest rate due on its debt. The ECB is just pushing out the day of reckoning.
(And forget about the principal being paid back. The recent bailout already cut the principal over 50% - and still there's no way even that will ever be paid back.)
This "delay and pray" tactic may be able to be extended a lot longer than any of us think. Then again, maybe it won't be able to be extended. Frankly, I have no idea.
My best guess is that commercial real estate may go as this author claims. For one thing, the creditors (banks) who loaned this money have been forced to list the debt at current market value - something they didn't have to do in 2010. So if they've been forced to accept "reality" on their books, then maybe the inevitable defaults will be "allowed" to occur. (The defaults have to occur at some point, because borrowers don't have enough cash flow to pay the interest due - see my original post and/or the Jim Quinn article.
Then again, when the day of reckoning finally arrives for commercial real estate and all this finally gets sorted out, the commercial real estate market will return to health. Normal commerce will resume.
Alas, the same can't be said for government debt (Greece, Italy, Spain, USA...you name it). We can anticipate far more can kicking - or as Jim Quinn calls it "delay and pray" - from governments. Their situation is far worse and far more hopeless than the situation in commercial real estate.
A commercial real estate crash is one thing. Governments possibly collapsing under the weight of their growing debt will be something else - to put it mildly.
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