Here comes the Commercial Foreclosure Wave

Looks like the dominoes are falling into place just as predicted.

Inquiring minds are considering the defaults on commercial property mortgages held by U.S. banks and that they rose in the third quarter, extending a pattern begun in late 2006 when real estate prices were close to a peak:

About $604.1 million of loans on office buildings, malls, hotels and other commercial properties went into default in the three months ended Sept. 30, pushing the default rate to 4.36 percent of outstanding loan balances, from 3.41 percent a year earlier and 4.27 percent at midyear, the New York-based real estate research firm said. The record default rate was 4.55 percent in 1992, according to Real Capital.

“While the default rate continues to trend higher, the most recent increase is the second smallest in three years,” Sam Chandan, global chief economist at Real Capital, said in the report. “Even though new defaults are moderating, banks have considerable challenges in drawing down the pool of unresolved distress.”

The writer then swallows Koolaide with this utterance:

U.S. commercial property prices rose 4.3 percent in September from the previous month as demand rose for the best office buildings in such major markets as New York and Washington, Moody’s Investors Service said on Nov. 22. The Moody’s/REAL Commercial Property Price Index had fallen to an eight-year low in August.

This is the same gobbly-gouk that ignorant writers and unscrupulous real estate professionals tried to spread in the earlier phase of this economic downturn…namely, that property mix doesn’t matter month-to-month. Remember how earlier in the residential numbers phantom price increases occurred? For a graphical representation…does this look like a price increase to you? (click on image to enlarge)

What’s interesting is that no one is answering the question how commercial real estate is going to turn around when residential foreclosures are building again, huge taxes increases (regardless of the Bush tax cuts) are coming next year, unemployment is very high, and states are running large deficits?


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