CNN is reporting the widely known fact that $700 Billion in commercial real estate loans that will mature in the next two years. Surprise! With rising vacancy, dropping rental rates and stricter underwriting standards, their pundit Don Peebles thinks that a lot of properties will go into foreclosure.

What a soothsayer.

Commercial real estate cycles have followed residential cycles since Lords kept serfs to work their land. Crops died off, tenant farmers couldn't meet the price of their rented land plots, the overlord took their land back and home, they couldn't work so stopped buying meat and fish, grocers went out of business, pubs couldn't pay their rent and every one clung by their fingernails or fell until a better crop came in and harvests improved.

Suddenly, the media seems to be catching on.

Those of us in the industry knew that commercial real estate would suffer, the only questions were and remain, how long will the market be slow and how far will values drop? As ever, the answer is yet to be seen. If layoffs continue, businesses will shrink requiring less physical space, more space will come on the market with fewer companies growing or starting up (government bailout money is still elusive for business, CBIA loans are difficult to secure, taking longer than ever, banks are skittish about lending...funny when those businesses might employ more members of the families whose homes are in jeopardy if they could expand their product and service lines and grow through the recession), and landlords will see more vacancy in their buildings, making it harder to meet existing mortgage payments, or refinancing terms.

Now, according to CNN's pundit, this isn't a big deal for the economy because someone else will pick up the property and people won't lose jobs like they did in the financial industry. It'll just be one investor or group of investors trading property to another group, so only a small pocket of people will be hurt. **Nice Spin if you can Get It.**

Conveniently, CNN's real estate report left out an entire sector of commercial real estate owners. The business owners who own their business property or those who own properties larger than they need so that they can live in their workspace for free. As their debt management issues impact them and their business, it'll be a sign that our economy and corporate health is still in jeopardy. He also neatly side stepped the issues that underlie vacancy in commercial and industrial properties. Empty spaces where companies once employed, once paid taxes to the towns and cities in which they are sited, dark buildings not being maintained. Don't let CNN fool you. In painting commercial real estate owners as an army of Donald Trumps that deserve a little humility, they neglect to look at the issues that create and are created for and by a commercial real estate bust.

When buildings go dark it won't simply be because people bought investments that were upside down at the top of the market; their debt exceeding their income. It will also be because companies failed, mortgages came due. It will mean that not only are more people losing work, but town city and county tax based services will suffer. Non-profits will suffer - fewer businesses, fewer sponsorships, fewer profits.

A commercial real estate money collapse will be felt in every pocket of America to some degree. It looks as though the crash will not be stopped with $250 Billion in commercial loans coming due this year. As with every bust, some areas will be hit harder than others and this time, Connecticut's barriers to business, though keeping us out of the hunt for desirable corporate headquarters and regional satellite business centers for the past ten years, will help us through the recession. Since we haven't grown like the rest of the country for the past twenty years, there isn't far for us to fall. Unless of course, our state government chooses to enforce more regressive corporate and sales taxes, in which case we'll only have our legislators to blame. Then again we're already 49th best state in the union to do business, how much farther can we fall?


April 20, 2009