27 Nov 09 The “Commercial Tsunami”, Film at 11:00…

Commercial Real Estate Collapse – The next wave

We have seen the “Residential Mortgage Crisis. The ensuing foreclosure rampage was the precursor of the Government bailout frenzy, the Stimulus that didn’t stimulate and barrels of Pork encased in the Obama Administration’s first budget. In response to the feeble attempts at fixes, unemployment has now reached 11.2% in Florida, higher elsewhere, and is expected to soar higher by all those that aren’t hypnotized by Obama’s smooth delivery.

The unemployment situation has brought the commercial real estate market right to the brink. As you see in the clip, values have plummeted. The real rub is in the structure of these big commercial deals. Where residential financing usually comes with a calendar of 15 to 30 years for repayment of principal; commercial deal frequently have very short term balloon payment requirements. The deals vary to be sure, but it is very unusual for a commercial loan to extend beyond 5 to 7 years (the payment may be figured, amortized over 15 or 20 years, but the balance becomes due and payable very early compared to residential loans). This means the excesses of the post 9/11 real estate run-up are all going to be coming due right in the middle of the worst recession in modern times.

To make matters worse the “Backers” of these loans are the REIT’s (real estate investment trusts); these are the institution of enormous size that pensions and other funds invest in liberally.

There is going to be another “Shoe Dropping” and it is going to be a big one! The current Administration’s answers of inflated job numbers and Pork called Stimulus will not cut it. There will be only one answer to stimulate and that is an answer the likes of which Pelosi and Reid will find repulsive. You see, the only answer will be to stop spending and cut taxes. They will comply because they will have no choice. If unemployment hits 15%, there could be riots in the streets.

It is as Moses said unto Pharaoh, “There will be a cry so loud, that you will surely let my people go.”

I sincerely hope it does not come to that…

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Tags: commercial real estate collapse, financial crisis, Obama, real estate, unemployment