What is it, who are the players, and why has it been deemed “by far the most serious looming issue?”
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You have buildings, offices, retail, industrial, apartments, that is commercial real estate.
It is a big market and property prices, just like everything else, went up during the pandemic.
There are two elements, the buildings and the debt.
Unlike residential, most loans on commercial are not guaranteed by the government, meaning there is not really a secondary market for them. They are held on the balance sheets of banks.
These are not 30 years loans, these are 5 y to 10 year loans, and they are usually ballon loans, meaning they are due upon expiration. Not normally a problem since they get rolled over each year and refinanced.
We are in a credit crunch, meaning these loans are not going to get refinanced at the same terms that the previous loan did. They will need people to put more money down to meet debt service coverage ratios or more restrictive loan to value ratios.
So these properties will go to special servicing where people try to figure out how to work out the debt. This can take years or decades. Meanwhile you have a mostly empty building people don’t want to lease because who actually owns it, who is going to maintain it, why rent here when better buildings with less drama exist elsewhere.
These buildings are also owned by insurance companies and pension funds. So if the they lose value, retirement accounts are at stake.
You can make money in real estate two ways, through periodic payments (slowly) or in appreciation (fast).
The fast way that has existed for the last 20 years, through lower interest rates increasing property values, is over. People who planned to sell to someone else at a higher price are bag holders, and cannot make money the slow way.
The mania is over, the panic is next and the crash will follow. Unless there is a bailout, which is needed to save pensions.
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