The Commercial Property Bust : A Concrete Problem

The Economist reports;

The aftermath of bubbles can last for a long time in financial markets. Wall Street has been celebrating the return of the Dow Jones Industrial Average to the terrain above 9,000. But it first passed that mark in April 1998. As with paper, so it can be with property. In Japan land prices are still nearly 60% below the peak they reached in 1991. Earlier this decade American homebuyers took false assurance from the oft-quoted fact that house prices had not fallen, at the national level, since the second world war; well, they have now. At the moment transactions have dried up in the commercial-property market as owners try to avoid selling at a loss. Those owners are implicitly assuming that a rebound is imminent, yet the downturn may be prolonged.

Such a downturn could inflict further damage on the banks. All the bad news may not yet be reflected on their balance-sheets; although they have had to take the hit on traded securities, like CMBSs, banks are usually slow to write down property-related loans. But as those loans come up for refinancing, losses will have to be taken unless owners put up more capital. Richard Parkus, an analyst at Deutsche Bank, reckons that American banks may eventually face $200 billion-$230 billion of losses on property-related loans.

As we've said before, square footage is square footage. Commercial rents have no where to go but down in general.