Commercial
Commercial Real Estate: The Next Bubble?
(SMART MONEY) - Fed Chairman Ben Bernanke may have declared the recession at an end, and credit may be flowing again. But there’s a dark cloud hovering over the banking industry and financial sector: commercial real estate. On a recent walk along Manhattan’s Fifth Avenue, I counted a dozen empty storefronts and for-rent signs, more than I can ever remember seeing along this fabled stretch of high-end retail space.
The collapse of residential real estate, especially the subprime-mortgage sector, has received enormous attention and press since last year’s panic. But as the residential market has shown signs of stabilizing, the commercial market has emerged as a potentially greater threat. There are $3.4 trillion in commercial real estate loans outstanding, with more than half of that owned by banks. Banks have been slow to mark down the value of these assets; Goldman Sachs estimated that banks are still carrying their commercial mortgages at an average 96 cents on the dollar.
No wonder the Federal Reserve has signaled its growing concern. I’m told that some within the Fed are advocating a new round of stress tests for banks with significant commercial real estate exposure. Goldman Sachs recently raised its estimates for total losses on commercial mortgage loans to $287 billion, of which $180 billion, or 63 percent, will be absorbed by commercial banks. Indeed, a collapse in this sector could prompt a crisis that rivals last year’s meltdown in severity.
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Real-estate investing is the road to success is laden with pitfalls, financial swamps and business roadblocks you should be sure to avoid.