Commercial Real Estate: Deeper In The Toilet

Once again, the New York Times reminds us, the weak economy is taking its toll on building owners all over the country. In New York, there are fewer hedge funds demanding space. In California it’s mortgage-related businesses, and even Texas real estate is succumbing as the end of the oil boom means less cash flowing into the state.

You already knew that the industry wants to be bailed out, warning of “stress” to the system if real estate owners are hit by a wave of defaults:

Jeffrey DeBoer, chief executive of the Real Estate Roundtable, a lobbying group in Washington, is asking for government assistance for his industry and warns of the potential impact of defaults. “Each one by itself is not significant,” he said, “but the cumulative effect will put tremendous stress on the financial sector.”

Where’s that stress likely to be felt? For one, regional banks:

In the last decade, they barreled their way into commercial real estate lending after being elbowed out of the credit card and consumer mortgage business by national players. The proportion of their lending that is in commercial real estate has nearly doubled in the last six years, according to government data.

There is good news here: Office rents should be cheaper and more available all around. And with new buildings still coming onto market, this should last a while — much like in the housing market, where we expect the cost of home dwelling to remain depressed, whether you’re a renter or a buyer. And since for businesses, their office space is purely a consumption good, rather than an investment, it’s really no big deal that the space is getting cheaper. And finally, we wouldn’t expect commercial real estate to go into dilapidation the same way weed-infested vacant houses get (unless, however, more cities come to resemble Detroit, where long-vacant buildings have trees growing up through the floors [seriously]).

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