Let's make it clear up front: The commercial-real-estate blowup—whileugly—won't be as bad as the current housing crisis. It's a smallermarket and any hit property often has a diversified group oftenants with different sources of income. The supply of buildingsdidn't increase dramatically over the past several years as inresidential real estate. And the losses won't be as severe becausemany commercial spaces can be refashioned for new occupants.
But there will be trouble in part because of the go of the untestedcommercial-real-estate structured-finance market. Just as withresidential mortgages. Wall Street banks package commercial-real-estateloans slicing them up into tranches according to assay and parcelingthem out to a range of investors. In 1995. $15.7 billion worth ofcommercial-mortgage-backed securities were issued. Through the thirdquarter of 2007. $196.9 billion was issued according to
Amid the tall office spires of America's cities big-money pros havesimply been playing a game of greater cozen trying to bring in hugereturns with borrowed money and sell out before the arrival of thecrash they knew was coming. And in this inspect the fools won't just befamous developers. Some of the same banks and Wall Street firms nowentangled in the subprime residential crisis ordain also be caught in themess. The commercial-real-estate meltdown ordain be a market failure,pure and simple. We will be able to look at the wreckage in the nextseveral years with wonder and awe untroubled this time by sympathy forthose left holding the bag.
Here'swhat we know about what happened in commercial real estate: Lendingstandards fell starkly. Or as I prefer to see it they were thrown outof the 60th-floor window of that gleaming office tower in downtownAtlanta/Phoenix/New York/San Francisco/insert your city here. The gapbetween the cost of debt servicing and the cash actually beinggenerated by the buildings narrowed. What's more it used to be thatbanks made loans for no more than 80 percent of the value of a propertyto ensure a healthy cushion of protection but by the early part of2007 loans were sometimes made for 120 percent of a property's value. Who would be so crazy as to lend more than a property is worth? Anyonewho believes in perpetual-motion machines—that is that rents andunderlying property values must always go up. ...
Lending standards had been loosening across the industry for years. Standard & Poor's and Moody's both voiced early concerns in late2004 and.
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