Once-trendy Melrose Avenue shopping area losing its cachet

An article forwarded to me by Jim from the LA Times uses words such as 'stay tuned' and 'this will not end well' to describe the urgency in the decline in commercial real estate. Do not dismiss this description as 'shock and awe' commentary used to foster an illusion. The following chart illustrates both the size (importance) and speed of deterioration of commercial real estate loan market. Commercial real estate loans as a percentage of total bank credit have fallen below 17% from recent highs near 19% in 2009. Year over year contraction rates are approaching 10% in 2010.

As the LA Times suggests, stay tuned! Further deterioration here could quickly snowball into another massive bailout.

Breakdown of total Bank Credit:

Commercial property is usually purchased in short-term loans--much different from the 15-30 year fixed rate loans on homes. When the term of a commercial loan is over, the loan is either re-negotiated under current interest rates, or the property is sold. But how do you sell commercial real estate that has fallen in value so steeply that the outstanding loan amount exceeds the salable price? You can't.

When customers don't come, businesses have to close. When enough businesses close, landlords, try as they might, cannot find tenants. When landlords can't find tenants, they default on their loans. What happens when enough banks who are too heavily invested in commercial real estate suddenly start having huge portions of their investment portfolios going sour (again)? Stay tuned...

It would appear that Los Angeles is entering phase two of this cycle. The great social experiment that was the State of California appears to be lost in an ever-accelerating death spiral. This will not end well.

Source: articles.latimes.com