While the residential real estate market continues to languish and there is little activity outside of lower priced first time buyer homes, a new disaster is in the offing: the collapse of the commercial real estate market. This next round of economic pain arises from a combination of overbuilding in some areas and the failure of banks to make loans even to credit worthy borrowers. As I have been arguing for over two years, unless and until real estate recovers, there will be no overall recovery of the economy. And a key to a recover is that the banks who have been bailed out, dolled out bonuses for themselves, and ceased lending start making loans again. Businesses cannot expand or take on new facilities when they are forced to operate solely out of cash flow and cannot secure financing for capital improvements - something I've had to do for years now. Otherwise, the downward spiral of values and foreclosures will continue. The Washington Post has a story that looks at this coming disaster. Here are some highlights:*
A mortgage crisis like the one that has devastated homeowners is enveloping the nation's office and retail buildings, and few places are likely to be hit as hard as Washington. The foreclosure wave is likely to swamp many smaller community banks across the country, and many well-known properties, including Washington's Mayflower Hotel and the Boulevard at the Capital Centre in Largo, are at risk, industry analysts say.
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The new round of financial pain, which some had anticipated but hoped to avoid, now seems all but certain. "There's been an enormous bubble in commercial real estate, and it has to come down," said Elizabeth Warren, chairman of the Congressional Oversight Panel, the watchdog created by Congress to monitor the financial bailout. "There will be significant bankruptcies among developers and significant failures among community banks."
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Unlike the largest banks, such as Citigroup and Wachovia, that got into so much trouble early on, the community banks in general fared better in the residential mortgage crisis. But their turn is coming: Not only did community banks issue a higher proportion of commercial loans, but they also have held on to them rather than sell them to other investors.
A mortgage crisis like the one that has devastated homeowners is enveloping the nation's office and retail buildings, and few places are likely to be hit as hard as Washington. The foreclosure wave is likely to swamp many smaller community banks across the country, and many well-known properties, including Washington's Mayflower Hotel and the Boulevard at the Capital Centre in Largo, are at risk, industry analysts say.
*
The new round of financial pain, which some had anticipated but hoped to avoid, now seems all but certain. "There's been an enormous bubble in commercial real estate, and it has to come down," said Elizabeth Warren, chairman of the Congressional Oversight Panel, the watchdog created by Congress to monitor the financial bailout. "There will be significant bankruptcies among developers and significant failures among community banks."
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Unlike the largest banks, such as Citigroup and Wachovia, that got into so much trouble early on, the community banks in general fared better in the residential mortgage crisis. But their turn is coming: Not only did community banks issue a higher proportion of commercial loans, but they also have held on to them rather than sell them to other investors.
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Nearly 3,000 community banks -- 40 percent of the banking system -- have a high proportion of commercial real estate loans relative to their capital, said Warren, whose committee issued a report on commercial real estate last week. "Every dollar they lose in commercial real estate is a dollar they can't use for small businesses," she said.
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The threat is especially acute in the District, the firm said, where the catalogue of troubled commercial real estate properties has grown tenfold since April. Moreover, the region has $7.3 billion in commercial properties that are underwater -- worth less than the mortgages on them -- according to CoStar.
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Nationwide, at least $1.4 trillion in commercial real estate debt is expected to roll over during the next three years. Warren said that half of commercial real estate mortgages will be underwater by the beginning of 2011. A fifth of residential mortgages are underwater now, she said.
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Things do not bode well and meanwhile we have a Congress that cannot get anything done. The GOP obstructs everything and the Democrats lack the spine to act. It's not a cheerful picture.
Nearly 3,000 community banks -- 40 percent of the banking system -- have a high proportion of commercial real estate loans relative to their capital, said Warren, whose committee issued a report on commercial real estate last week. "Every dollar they lose in commercial real estate is a dollar they can't use for small businesses," she said.
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The threat is especially acute in the District, the firm said, where the catalogue of troubled commercial real estate properties has grown tenfold since April. Moreover, the region has $7.3 billion in commercial properties that are underwater -- worth less than the mortgages on them -- according to CoStar.
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Nationwide, at least $1.4 trillion in commercial real estate debt is expected to roll over during the next three years. Warren said that half of commercial real estate mortgages will be underwater by the beginning of 2011. A fifth of residential mortgages are underwater now, she said.
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Things do not bode well and meanwhile we have a Congress that cannot get anything done. The GOP obstructs everything and the Democrats lack the spine to act. It's not a cheerful picture.
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