“In New York City alone, there’s about $70 billion worth of commercial mortgages — some of which have been sold off as mortgage-backed securities, naturally — coming due this year,” Kevin D. Williamson writes at National Review Online. “The national total is more than $150 billion, or a bit more than 1 percent of U.S. GDP:”
Trepp [a commercial mortgage-backed securities analysis firm] gets to the real concern here, which is that these mortgages and mortgage-backed securities are sitting on the balance sheets of a bunch of still-wobbly banks. How wobbly? About 100 banks went under last year, and about 250 are expected to go under this year. Trepp finds that, of the banks that went toes-up in 2011, bad commercial real estate accounted for two-thirds of their failing loans.
This is a textbook case for the Austrian business-cycle theory: Artificially low interest rates and loose money produce overinvestment, by both bankers and builders, in a bubble — this time, offices, apartment buildings, and retail space — that can’t be sustained once the artificial stimulation comes to an end, as it must. In this case, that malinvestment has to be worked out at two levels: At the financial level, among the lenders and borrowers, but also at the physical level: There’s going to be a lot of dark storefronts out there, with serious long-term consequences for nearby neighbors and for local real-estate markets: Foreclosures will put more property onto the market, driving down rents and subsequently making existing loans less tenable as the cashflow of commercial properties is diminished. They called the Depression-era tent cities “Hoovervilles.” The next time you see a mile of half-abandoned strip malls, think “Obamaville.”
Not as bad as 2008? Probably not — and let’s hope it is not even close. But there’s a $3 trillion commercial-mortgage market lurking out there, and a lot of CMBS investors — banks and insurance companies in particular — that Washington thinks are “too big to fail,” a problem we persistently refuse to address.
Related: “Shipping Rates Go… Negative.” I’ve seen this movie before.
More: James Lileks kicks off a new section of his sprawling Website titled “Malls of Yore.” There coming years will provide the opportunity for far too many potential additions.
Meanwhile at Ricochet, George Savage explores how brutal — and brutally slow — it can be to get a retail business off the ground in über-blue San Francisco. Satirizing the warped priorities of the “mostly violent” Occumutants he asks, “Why Not Occupy City Hall Instead?”
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