COMMERCIAL REAL ESTATE

May 13 -- Commercial real estate is the next shoe to drop according to Ken Langone, Home Depot co-founder. This is a widely held belief that hasn't been spoken on much lately because of the lack of data. Has the shoe already started to drop? Can someone quantify this subject?

According to Martin Cohen of Cohen & Steers, there are a few hundred billion dollars of commercial real estate loans coming due in the next 3 years. However, if only a small percentage of the debt defaults, then we may only be talking 10-30 billion dollars in defaults. Certainly a painful situation for a sector, but a far cry from the undermining banking and residential real estate debacles. Moreover, consider that asset prices aren't really that overvalued in the commercial real estate area, as opposed the residential. The overvaluing and losses people are taking when selling homes is encouraging the economic downtown cycle in the residential sector. However, it will be lost business that will keep commercial real estate loans from being paid, and while companies might not be thriving these days, company defaults based on inability to pay fairly valued loans is less severe than the residential situation and ripple effects (esp considering companies have the power to cut costs and trim in a more significant way than individuals). So overall, the next shoe may be commercial real estate, but the imprint it leaves when it falls is likely to be less severe and dramatic than the residential situation that predated it and that looms eerily around all real estate conversations.