Well, it’s official…it looks like the commercial real estate industry is plunging into a foreclosure crisis due to reduced lending, stagnant consumer spending and a whole lot of bad loans. According to an article in the Star-Telegram , the commercial real estate foreclosure crisis is getting so bad that even Morgan Stanley reported a loss of more than $1.2 billion mostly caused by commercial real estate foreclosure losses. And if the foreclosure crisis worsens, many experts expect that some banks that rely on commercial lending may face bankruptcy.
So what went wrong? The article sums it up succinctly:
“…commercial real estate market’s fortunes depend largely on free-flowing credit markets and cranked up spending by businesses and consumers… When the economy is growing, businesses’ demand for space also grows. Consumers also tend to spend more, which boosts retailers and hotel operators, and stokes demand for more retail space… But when the economy slows or enters recession, as it did in the fall of 2007, the reverse happens. Businesses scale back their needs for office and industrial space and trim payrolls. People who lose their jobs may be forced into leaving their apartments. Retail chains see sales tumble as consumers rein in spending and may be forced to shutter locations or even go out of business.”
That’s what’s happening right now. Many retail businesses have already filed bankruptcy, leaving huge gaping holes in some of America’s biggest commercial districts. This has put many commercial real estate businesses under pressure, causing many to face foreclosure and even bankruptcy. Already, the commercial lending industry has faced commercial loan delinquency rates that have doubled and predict that financial losses related to commercial real estate loans could reach up to $150 billion.
What it means for the average consumer? Unfortunately, Joe and Jane average may be hit with more job losses and tighter lending standards if the foreclosure crisis continues.