Commercial Real Estate Hyperpocalypse: Where is Elizabeth Warren Getting Her Numbers?

Some deliciously diabolical news went mostly unremarked this week. "Commercial Real Estate Eyed as Looming Trouble Spot?," CBS News reported. "[TARPCOP board member Elizabeth] Warren Says to Expect Commercial Real Estate Trouble," said The New York Times, while Minyanville noted, "Commercial Real Estate at the Center of Credit Crunch."

What these laid-back headlines indicated was that Warren told CNBC Monday that half of all commercial real estate loans would be underwater by the end of this year. (The term "commercial real estate" encompasses most investment property, including retail and residential rental. "Underwater" describes mortgages in which the remaining principal is larger than the current appraised value of the property.)

Why wouldn't a showstopper like that get more attention? Maybe because it's really unclear how Warren is arriving at her estimate.

Warren refers to $1.4 trillion in CRE debt that will roll over in the next three years. She has also said a fifth of all CRE debt is already underwater, and at least rhetorically she seems to associate these two figures. So is that a fifth of $1.4 trillion, $280 billion? Or is it a fifth of the total CRE debt market of about $3.5 trillion, $700 billion? (This is the figure that COP says is currently underwater.) If it's the former, Warren is saying that $420 billion in commercial property will sink below outstanding principal in the next nine months. If it's the latter she's saying $1.05 trillion will do so.

Note that while being underwater is by far the most likely indicator that you will default on your mortgage, it is not the same as being in default. Commercial real estate distress is not a national phenomenon. It is concentrated among such usually suspect areas as Los Angeles, New York and Chicago. Actual CRE defaults are concentrated in those areas, plus such hall of famers as South Florida.

While the Washington, D.C. area has only the fifth-largest concentration of underwater commercial real estate loans, the capital leads the nation in CRE loans that have actually gone bad. So you can expect to keep hearing about the need for a national response to the CRE crisis.

But this is not a crisis in need of a national response, because the crisis (if you call a drop in the price of an overvalued asset a crisis) was only partly national in origin. State, county and municipal governments zoned and midwifed all those ghost malls and multi-unit residential behemoths of the dead.

No-one dast blame the smart growthers for cursing us with these vast and trackless deserts of investment property. But that doubly means Uncle Sam should not be involved in solving this problem.

The sentiment value of CRE for Warren—who suffers from the truly grand delusion that she is a defender of common folk against monied interests—is that the CRE decline will hurt mom and pop banks. That may screw President Obama's plan to encourage local banks to use more lax standards in business lending. But it is not something that should concern you, me, or anybody else except the people who made these bad deals in the first place.

Interventionists like Warren would counter that the feds need to act because FDIC will not be able to bear the liquidation of the unwisest local banks. I say we've been down this road before. The amount the government will actually have to pay to liquidate banks that fail because of bad CRE loans will be well shy of the figures mentioned above. And if in this case the market decline really does stretch the FDIC's capabilities as badly as alarmists claim it will, the most efficient solution to the problem problem will still be simply to give more money to the FDIC, not to pour more money into failing banks.

Warren may well be right that hundreds of billions or more than a trillion in CRE value will vanish by the end of this year. But she needs to give a little more detail when she makes these broad claims—which in Warren's universe are always preparatory to demanding a larger percentage of your hard-earned dollar.