Commercial Defaults Loom

by Steve Hueter, Real Estate Commercial Group

2010 begin with three more banks closed by the FDIC.  The cost it your keeping score, about 56 million a share-loss agreement.

If you think we are out of the woods and safe….than think again.   Yeah I know what your saying “….but the stock market is above 10k again and the government is spending trillions to stimulate the economy and unemployment has slowed”.  This all may be true but there is a factor that could put the brakes on this economy faster than Kobayashi can down Nathan Hot Dogs at the annual 4th of July Coney Island eating contest.

This disastrous factor of course is referring to the looming Tidal Wave of upcoming Commercial Loan defaults.  The impact experts agree could be three times as devastating as the residential debacle we have been experiencing for the past two years.  The Phoenix area, that was once the envy of most cities for the rapid growth both in the residential and commercial arena, is now feeling the effects of builders and banks who put dollars before common sense.  Looking around the once thriving desert city you see abandoned or an abundant amount of vacancies in most strip malls, office condos, and industrial warehousing.

It only makes economic sense that if these buildings are not occupied than eventually the owners will either come out of pocket or just stop making the payments.  Most business owners are not dumb, they will usually not chase bad money with good.  Meaning they will cut their losses and keep what they got.

We have spoken to several business owners that when times were good they wanted to grow and many times took on additional debt by buying a building and expanding their business.  Since then the economy is not bringing in the business that got them there and now they cannot meet their obligations.  Once the bank forecloses, the business may be able to regroup and keep their doors open at a new location, but many times this commercial foreclosure may spiral them out of business.

Now let’s look at the effect on the economy by this business closing.  Lets assume that it is a small company of 30 employees.  Let’s say 10 are homeowners, 10 renters, and 10 live with family members (obviously these numbers may not be exactly accurate but will use them for this example.). With the unemployment rate of aprox 10% we can assume 3 will be out of work.  Let’s say that we have 1 from each of the above groups.  Well if that homeowner is not working than chances are he/she will soon become delinquent on their mortgage and will be placed in foreclosure.  If the renter is not paying the landlord his rent so the landlord can pay the mortgage he too may be forced into foreclosure.  The person that is living with a family member may be contributing to the household to help keep them afloat.

Now let’s look at the other 27 employees that found new work.  The latest statistics are that out of the individuals that got laid off almost half will accept new employment at a lower wage.  Even though they are employed it is possible that their new income will not be enough for them to meet their financial obligations and could cause another 4 or 5 people into a foreclosure situation.

The point that I am trying to make is that if the Commercial Loans default like the experts predict than we will have a whole new round of Residential Foreclosures to slap the real estate market in the face.  Hopefully the government and the banks are listening and understand the magnitude of their decisions.  Commercial loan workouts and commercial loan modifications may not be the most wonderful thing for the bottom line but may save us from a whole new catastrophe.