Consumer Deleveraging to Topple the Commercial Real Estate Market

The US is in a state of consumer deleveraging — given unsustainable levels of personal debt and a weak job market – and as a result retailers are likely to continue facing hard times. The highly leveraged ones in particular are poised to watch their fortunes disintegrate. As a guest contributor to Naked Capitalism, Jim Quinn of The Burning Platform offers new insight on how the collapse will unfold in the commercial real estate (CRE) market.

According to Quinn:

“To give some perspective on our consumer society, here are a few facts:

* There are 105,000 shopping centers in the U.S. In comparison, all of Europe has only 5,700 shopping centers.

* There are 1.2 million retail establishments in the U.S. per the Census Bureau.

* There is 14.2 BILLION square feet of retail space in the U.S. This is 46 square feet per person in the U.S., compared to 2 square feet per capita in India, 1.5 square feet per capita in Mexico, 23 square feet per capita in the United Kingdom, 13 square feet per capita in Canada, and 6.5 square feet per capita in Australia…

“…Let’s look at some facts about the commercial real estate market and then assess the future:

* The value of all commercial real estate in the U.S. was approximately $6 trillion in 2007 (book value, not market value).

* There is approximately $3.5 trillion of debt financing these commercial properties.

* Approximately $1.4 trillion of this debt comes due between now and 2014.

* The delinquency rate for all commercial backed securities exceeded 9% for the 1st time in history last month and has more than doubled in the last 12 months.

* Non-performing loans are close to 16%, up from below 1% in 2007.

“Do these facts lead you to believe that the commercial real estate sector has bottomed, as stated in the Wall Street Journal? The Federal Reserve realized the danger of a commercial real estate collapse to the banking system over a year ago. They have encouraged banks to extend and pretend.”

Quinn goes on to describe his concerns about the “shadow monetization” of CRE debt. He points out that banks are forgoing overdue debt repayments because they see no point in either chasing after money they know isn’t being generated by ghost shopping malls or foreclosing because it isn’t a viable option.  Even if banks repossess CRE, they would be unable to find any buyers for the inventory in the current market. So, rather than admit the failure, banks are sweeping the mess under the rug, following the “extend and pretend” model described above, and hoping for an unlikely CRE market rebound.

You can read more details in the Jim Quinn piece on how consumer deleveraging equals commercial real estate collapse, appearing at Naked Capitalism.


Rocky Vega,
The Daily Reckoning