Minyan Peter, former treasurer for a major US bank is taking a stab...

Minyan Peter, former treasurer for a major US bank is taking a stab at answering Minyan Mailbag: Is Commercial Real Estate Next? BEA 4th Quarter GDP 1st Estimate 0.7% Q&A: Why Did GDPNow Rise After Durable Goods? When are Construction Revisions Coming? I've seen a fair amount of debate about whether or not Commercial Real Estate is the 'next shoe' based on the evidence that CMBS spreads are widening and with a potential recession, corporate borrowers are going to become worse credits. Most of the CRE bearishness is of the blogging/doom-and-gloom nature, I thought maybe you could provide a bit more of an analytic approach based on the structural similarities and differences of the two markets. While I am not at all an expert on Commercial Real Estate, I have to believe that it too will be hit badly by the credit crisis for one simple reason - asset deflation. As you probably have read, I am clearly in the asset deflation camp - which I see as the simple consequence of a higher cost of capital coming from a return to risk premia by credit investors. Having said that, I think that commercial real estate market, like the LBO market, like the stock market is still in the 'decoupled' mindset - where corporate earnings can grow despite a slowdown in consumer spending. Like this current stock market rally, denial is a hard thing to fight. But I would argue (am arguing) that we are either in or will shortly be in recession and with it will come further asset deflation. And this time the corporate world will be hit. When that happens, I believe we will move from denial to panic. Then watch out. The following is a comment from 'KIA' on recent blog entry. I cannot verify the facts but the comment is both believable and interesting: In two different jurisdictions on Northern Virginia today, I personally observed hundreds of thousands of dollars in judgments being entered on defaulted commercial leases. This is in an area which is generally seen as 'recession proof' due to huge federal government spending, yet on case after case, there was $60,000.00 default on one, a $40,000.00 default on the next and so on. If I had to guesstimate, I'd say there were probably at least $300k in commercial rental defaults per jurisdiction (and we are drawing a distinction between commercial and residential - - it's standing room only in the courtrooms for the residential evictions). This has been going on for weeks and there is no reason to think it won't continue for the forseeable future. Small businesses are evaporating and their disappearance is costing the landlords dearly. This will have consequences. ' That's a good question but an arguably better one is 'When does it matter?' because just like residential, everyone should know that it eventually will. The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.