The Commercial Real Estate Time Bomb

To demonstrate the seriousness of the problem it is important to first present the magnitude of the refinancing problem. With Loan to Values dropping, underwriting standards being tightened, only a small percentage will qualify for refinancing at maturity.

Banks and life insurance companies have approximately $1.7 trillion and roughly $300 billion in commercial loan exposure, with $1.4 trillion maturing through 2013. As the equity deficiency for many loans is far too large to be tackled by accelerating the amortization over any period of time, and as for "value growth", with hundreds of billions in distressed mortgage building up over time via these same extensions (even if successful), the likelihood of property price appreciation is laughable: the flood of excess supply of distressed mortgage to hit the market is about to be unleashed.

And, at last, there is the view that the refi problem could fix itself, based on the argument that cash flows are likely to rebound quickly as the economy begins to improve due to pent-up demand. Ironically, it would require cash flows rebounding far beyond their peak levels to push values up sufficiently to overcome the steep declines. This is equivalent to predicting that the market will be saved by the next rent and real estate bubble.