Boom2Bust.com

Wilbur Ross: Commercial Real Estate Crisis Still Looms

A well-known billionaire vulture investor has joined the growing chorus of financial types predicting a commercial real estate crisis in the United States. From the CNBC website today:

Commercial real estate faces a crisis in the coming months that—though not as serious as the residential market collapse—will cause significant problems, investor Wilbur Ross told CNBC.

Assumptions made in the earlier part of the decade about growth for the commercial market have proven untrue, leaving billions of contagion and problems across the economy, the famed vulture-fund executive said in an interview.

“The same reckless lending that characterized the subprime mortgage business in residential was also characterizing what went on in commercial real estate in the mid 2000s,” Ross said.

When banks were making the commercial loans they did so under the assumption that rent rates and occupancy would increase while capitalization rates would go down, he said. None of those things have happened, he added.

“Everything’s going in the wrong direction and I think we’re going to see quite a lot of tragedies in that sector,” Ross said.

The only bright spot is that the fallout shouldn’t be quite as dramatic as the losses from the collapse of the subprime resident mortgage market.

Subprime mortgages accounted for $3.5 trillion on bank balance sheets while commercial adds up to a relatively meager $1.1 trillion.

$1.1 trillion meager? According to Ross, real estate tycoons might not want to get their hopes up about a bailout being tailored for them. He explained:

I don’t think the federal government is going to do much to help the commercial building side, because individual home owners vote, but buildings don’t vote.

We’ll see about that Mr. Ross. Washington has been getting into bed with Wall Street and other big money long before your 71 years on this planet.

Source:

“Commercial Real Estate to Cause ‘Tragedies’: Ross”
CNBC, November 3, 2009