Commercial real estate is dealing with the neutron bomb effect. The buildings still stand but the inside is gutted as if vultures had devoured a carcass. What we are seeing, like in many other sectors of our economy, is a distinction between reality based economics and the inflated prices of Wall Street. If we look at the stock market, you wouldn’t know that people are lining up at Wal-Mart at midnight at the end of the month waiting for paychecks or government assistance to clear simply to buy food. You also wouldn’t know that 27 million people are either unemployed or underemployed. The irony of this is banks do know how bad the economy really is including the disaster that is commercial real estate. Banks are building up reserves to brace for what is going to be a long and hard road ahead.
To understand commercial real estate, we first have to see the actual damage. In 2007, commercial real estate values came in at approximately $6.5 trillion backed by $3.5 trillion in loans. Today, the $3.5 trillion in loans are still on the books, but the values have fallen to about $3.575 trillion. This is how it looks:
