If you think residential real estate is having problems, you should shift your gaze to the mammoth issues confronting commercial real estate. Little is mentioned about commercial real estate (CRE) in the mainstream media yet this is a $3 trillion market (or twice the annual GDP of Texas). Much of the problems in CRE are profound and pose systemic risks to the banking sector. While the current attention is on fraudulent paperwork on residential housing, the biggest and most hushed bailout of commercial real estate is occurring. The Fed directly buying up questionable mortgages from banks is an indirect form of bailing out CRE. Yet in some instances, the Fed has gone ahead and directly taken on the role as owner for places such as a mall in Oklahoma. While U.S. residential property prices have fallen approximately 30 percent CRE has fallen by 42 percent.
There is nothing that is remotely good for the economy with the data in the chart above. The CRE market has completely collapsed. Yet banks are simply rolling over loans even though values have collapsed and are merely keeping inflated assets on their balance sheet instead of recognizing losses. If we break out the above data into markets, we see the same coastal states with deep housing problems emerging again:
This is interesting data. For South Florida apartments prices have collapsed a stunning 52 percent from their peak. Yet in Southern California, apartment prices have fallen by 22 percent. The difference here is that residential home prices are still inflated in California while the Florida housing market has corrected fiercely. In many places it is nearly the same price to own as to rent (this is not the case in California). The above chart measures the actual price of the apartment building, not rents by the way. Yet these areas are not the only two suffering. New York office building property values are down nearly 40 percent from their peak. In other words, many banks would fail today if they had to mark to market the value of their CRE debt.
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