Today’s Top Headline: Commerical Real Estate in the Crapper

It feels like I just talked about this the other day…

How the commercial real estate market would be set to see higher delinquencies and losses come 2009. Looks like i’m not the only one who feels that way.

Dec. 22 (Bloomberg) — U.S. commercial properties at risk of default could triple if rental income from office, retail and apartment buildings drops by even 5 percent, a likely possibility given the recession, according to research by New York-based real estate analysts at Reis Inc.

Lenders that used optimistic rent estimates to grant mortgages beginning in 2005 stand to lose as much as $23.1 billion, or 7.02 percent, of total unpaid balances if landlords lose 5 percent of net operating income, according to Reis. Analysts examined data on 22,890 properties that together may account for unpaid loans of about $329 billion in 2009, said Victor Calanog, director of research.

Banks are at risk as office vacancies are forecast to rise to 15.6 percent next year from an estimated 14.6 percent at the end of 2008.

I can’t imagine banks being willing to lend too much considering the losses that they have yet to face.

Listen, reader, the commercial real estate market has to see losses. It’s the only thing that could happen when you see consumer spending drop as much as it has.

The logic goes like this…

1. Consumers are running out of money, so they buy less.

2. As consumers buy less, businesses suffer and layoff workers.

3. This causes even less spending in the economy, which results in businesses going bankrupt or closing the doors (resulting in more people losing their jobs/income).

4. As businesses close the door, they miss their commercial real estate payments and then banks have to take the write down.

So you see, a commercial real estate downturn is to be expected after seeing the economy slow as much as it has.

And with commercial real estate losses picking up steam, you can be sure that corporate bankruptcies, bank failures, and credit card defaults will all slap the banks like the greedy institutions they are.

Looking over the next year, this market is going to struggle. It won’t be an easy ride. That’s why you should position yourself short after any bear market rallies.

- CD