Commercial Real Estate is Collapsing: Will The Fed Bail It Out?

As our economy braces for round two of the residential real estate collapse (see earlier posts for data), the commercial real estate market is in full blown collapse. Formerly high-flying Maguire Properties is the latest REIT to hit the wall, as it just announced that it is turning seven buildings with over $1 billion in debt over to its creditors:

I Would Bet Maguire Is Completely Insolvent

As businesses close down, they are no longer able to pay their leases and tenants that remain are negotiating greatly reduced lease terms. The problem is, just like with the housing bubble, commercial real estate became catastrophically overbuilt and overvalued. As the underlying economics collapse (i.e. tenant cash flow) so too does the value of the properties. You can see what's happening with vacancy rates in the biggest cities from this graph from an article in today's Wall Street Journal:



It will be interesting to see if the Fed addresses this situation when they release their policy statement from this week's FOMC meeting Wednesday afternoon. We already know that Bernanke has included Commercial Mortgage Backed Securities as part of his buy-worthless-assets-with-taxpayer-money program. But will the Fed become even more proactive in attempting to support the unsupportable other than with printed money?

The commercial real estate mortgage market is over $3 trillion (this included multifamily apartment buildings). What makes this catastrophe worse is that we have no idea of the total size of the derivatives which are attached to this debt. There is just no possible way that lending "stress tests" incorporated the above vacancy rates when most of the current commercial mortgage paper was underwritten.

The banks are soon going to facing the second wave of residential housing defaults AND a tsunami in commercial real estate defaults. Rest assured the the stock market and the U.S. dollar will not fare well in this next storm. We suggest moving a healthy portion into the only port with a 5000 year track record of survival - gold.