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A Day of Reckoning for U.S. Commercial Real Estate

Why higher delinquencies should soon be a reality

by Bob Stokes
Updated: January 25, 2017


[Editor's Note: The text version of the story is below.]

One might take the view that the real estate bust, which started with the 2006 top in housing prices, is a thing of the past, so why bother re-visiting it.

For at least two good reasons: First, so you can learn how the consequences are still playing out. Second, so you can understand why we believe that another shoe is set to drop.

We've recently discussed residential real estate in these pages, so our focus now is the commercial side of the business.

Let's set the stage by reviewing what our Elliott Wave Financial Forecast said well before the worst days of the real estate crash. This is from the December 2006 publication:

With prices of REIT indexes extending to new heights on November 24, [2006], the consensus is that commercial real estate will “cushion the impact of the housing slump.” But it is only a matter of time before every type of property gets pulled into the deflationary spiral.

Indeed, about a year later, commercial real estate prices topped, and a big crash followed, as this chart from the October 2010 Elliott Wave Theorist shows:

Since the bottom, there's been a notable development: Commercial real estate values have now surpassed their prior peak.  Yet, there is one big red flag.

Review this chart and commentary from a January 24, 2017 Bloomberg article:

A $90 billion wave of maturing commercial mortgages, leftover debt from the 2007 lending boom is laying bare the weak links in the U.S. real estate market.

It’s getting harder for landlords who rely on borrowed cash to find new loans to pay off the old ones, leading to forecasts for higher delinquencies.

As you probably know, many commercial mortgages are packaged into bonds. So, as the article notes, higher deliquency rates sets the stage for bondholder losses.

In our own research, we find even more evidence that the bond and real estate markets are on shaky ground.

We are now preparing our subscribers for what we see just around the corner.

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