Can there be a morning after for U.S. real estate demand, if the market can make it through a night during which it capsized after being torpedoed by an iceberg?
We checked in on the state of residential real estate yesterday, and Reason has also been documenting the commercial real estate hyperpocalypse for a long time.
In 2009, during heady days of hope and change, we tracked the CRE industry's heavy lobbying push in Washington (the capital), and we rode along as Jim the Realtor® patrolled the ghost malls of San Diego County.
In 2010, as a grateful nation was gearing up for the first Summer of Recovery, we noted that one reason for the yelping about federal CRE intervention was the D.C. Beltway's concentration of distressed CRE. The greater Washington area at the time had the nation's heaviest volume of properties in foreclosure, bankruptcy, restructured or modified status, and lender REO. Also at the time, the very popular interventionist Elizabeth Warren predicted half of all CRE would be underwater (i.e., the current sale value of the property is less than the outstanding balance of the loan) by the end of 2010.
The real estate market in Washington has since worked through more than half of that distressed volume and lost its dubious title as the nation's most troubled CRE market. And it looks like Warren's premonition was too conservative. Deloitte & Touche says 60 percent of CRE loans scheduled to come due between 2011 and 2015 due – about $1.7 trillion worth of debt – are underwater.
As the Washington example shows, that's a problem with a solution at hand: Just keep cutting your price until somebody buys your inventory. No quantitative easing necessary. No Bernankean drivel about the risk of deflationary shocks required. No need for additional stimulus or Harper's Cuforhedake Brane Fude or eye of newt. In fact, despite realities that continue to exceed the nightmarish predictions of government apparatchiks, the current news is that there's a "mini-pop" in CRE.
The imperative not to rescue commercial real estate is even clearer than it was in the case of residential real estate, because the state was an even more central player in inflating the original bubble. City, county and state governments spent heavily and worked hard to deliver tax-subsidized mixed-use ghost malls and New Urbanist dud-hubs all over the country. Now that these products have failed in the market, local governments could solve their problems by lifting zoning restrictions and allowing the real estate to be rented or sold, at attractive prices, for whatever purposes buyers have in mind.