Last year, I did a blog entry asking whether the faltering United States commercial real estate market was going to create a new mortgage crisis, resulting in a double dip recession.
Now we have reports that the Congressional Oversight Panel is warning that a wave of defaults on commercial real estate loans next year could see US banks losing $300 million. According to the report, about $1.4 trillion in commercial real estate loans will reach the end of their term between 2010 and 2014. It says commercial property values have fallen more than 40% since the start of 2007 and more than half the borrowers are "under water", meaning they owe more on the property than what it's worth with the collapse in prices.
This will affect more than 3000 small and mid-sized banks.
The thing that riles me the most about this report is that Treasury secretary Tim Geithner came out this week saying on the Department's web site that the cost of the bailout is falling and that the work is more is or less done. "A year later, the actions we took, alongside the Recovery Act, have worked to restore economic growth and financial stability,'' Geithner says. "Access to credit is improving and the cost of borrowing for businesses, consumers, homeowners, and state and local governments have fallen sharply."
But if the report from the Congressional Oversight Panel is right, nothing could be further from the truth. The US government will have to bail out those banks to avoid another crisis. Geithner is being less than truthful.
At the same time, you can bet the sharks of private equity will be ready to jump on cheap commercial real estate. As Leon Black, founder of Apollo Management, told the Financial Times, it's going to be an absolute bonanza.
You have all the right to be skeptical about commercial real estate or even about investing in real estate in general but I think you should also see that there are still good investment possibilities in real estate. Now is the perfect time to buy.