Friday, November 28, 2008

Commercial Real Estate the Next Crisis

There is a commercial mortgage problem that is growing in America. According to analysts the commercial retail market is in serious trouble, with a large number of foreclosures and mortgage defaults, and the pace is expected to quicken. Analysts say the number of late payments and defaults will double, if not triple, by the end of next year. The commercial real estate market is quite similar to private real estate market, and so the potential for crisis is very high, except the numbers are much larger and payment terms are much shorter. Unlike home mortgages, businesses don't pay their loans over 30 years. Commercial mortgages are usually written for five, seven or 10 years with big payments due at the end. About $20 billion will be due next year, covering everything from office and condo complexes to hotels and malls.

This is really bad news for more than just these particular property owners. When businesses go out of business, employees lose their jobs. Communities and towns lose the tax revenue, which cause problems for school budgets and the social services.

Yes lots of companies have survived plenty of downturns, and this is no different, but a lot of economists see this recession playing out like never before. In the past, when businesses hit rough patches, owners negotiated with banks or refinanced their loans. But many banks are no longer hold the loans they made. Over the past decade, banks have increasingly bundled mortgages and sold them to investors. Pension funds, insurance companies, and hedge funds bought the seemingly safe securities and are now bracing for losses that could ripple through the financial system.

The retail outlook is particularly bad. Circuit City and Linens 'n Things have sought bankruptcy protection. Home Depot, Sears, Ann Taylor and Foot Locker are closing stores.

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