This is not about bank failures and mortgagees not able to pay their bills. The failed economy is about to dismantle the complicated structure of commercial financing, and is about to effect mezzanine debt, loan participation arrangements, and various derivative transactions such as loan securitization agreements. When that happens it will not only be the banks that suffer significant financial loss, but also investors’ equities that are subordinated to commercial real estate mortgages and those investors will loose considerable wealth.

            In essence, it is about the fact that malls are closing all over the country. It started several years ago and time is now running out on investors and owners of commercial property who must take action to preserve the wealth they have accumulated in the real estate bubble that has now collapsed.

            Infusing money into commercial real estate to avoid foreclosures does nothing to put disposable cash into the hands of consumers.  All the bailouts in the world will not stimulate consumption by customers who do not have jobs, and who are themselves in debt for trillions of dollars, and they are unable to pay their current bills. Essentially the consumer is bankrupt. The writing has been on the walls for at least the past 4 years, and I have been saying for the past two years that commercial real estate is about to collapse.

            The only hope for investors, in my opinion, is that China will cash in its treasuries and use that money to purchase depreciated commercial assets, which will have the effect of artificially propping up price for a time before the final and total collapse comes, which is obvious to anyone who studies the economy, and is not reading the NY Times for answers.

            While it is true that fewer retail outlets will mean more business for those that survive, the question is who will the survivors be? Certainly those that have greater financial liquidity and located in strategic locations will survive the longest, but it will just be a matter of time before higher taxes on real estate and income bleed profits from investors, and local governments destroy even the most profitable ventures with additional fees, fines, and regulations.         

            Rents can be expected to fall precipitously. As existing tenants default on payments, replacement tenants will be difficult to find and in order to fill vacant buildings and stores, rents will need to be attractive. Additionally since the President intends to pass cap and trade and has openly admitted that it will cause a large increase in energy bills, the squeeze will be on between landlords who require cash flow and tenants who must pay the additional carrying costs of expensive energy.

            Virtually guaranteeing a collapse in commercial real estate values will be the effect of mortgage defaults which will flood the market with low priced commercial real estate. Given that $1.4 trillion is owed by commercial borrowers which are debts are due to mature in 2014. Given that about half of those montages are already underwater. Given that since 2004 commercial real estate has declined by 40%. Given that it is unlikely that the Fed’s will be able to cover all the bad debt to support the commercial market, we can expect the worst areas of the country to go first. Prices in Atlanta for example have fallen 50% from their peak in 2007, and 30 Georgia banks have already failed since August of 2008.  The Fed’s may be concerned about propping up the banks that hold so much of the national debt, but you can be assured that they are not coming to the aid of commercial real estate interests.