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At our New Year’s Eve party, I briefly got into a conversation with a friend about the next shoe to drop here in Orange County: now that residential real estate has finished (or nearly finished) its implosion, it’s time for commercial real estate to implode. But that’s not just a problem for Orange County, of course. Matt Yglesias points us to Gillian Tett:

The [Institute of International Finance] calculates that in March 2008, there was about $25bn worth of pre-crisis investment grade commercial real estate in distress. By March this year, however, that number had exploded to $375bn (and has probably swelled since).

Thus far, the banks have “dealt with potential delinquency problems in part by extending loans until 2011-13”, the IIF notes. Or, in layman’s terms, they have swept it under the carpet. But while this avoided defaults, the IIF reckons that about $1,400bn of CRE loans must be refinanced before 2014. Alarmingly, “nearly half of these are at present ‘underwater’, ie have mortgages in excess of the current value of the property”, it adds.

What’s more, as Matt points out, owners of CRE aren’t subject to the guilt-laden appeals to moral probity that homeowners are. Rather, “commercial property is owned by rich businessmen who’ll be expected to act like rich businessmen and try to maximize profits.” This means they’ll just default if it makes sense to do so. And in a lot of cases, it probably will. You can add this to the ever-expanding list of possible shocks to the global economy (oil, China, PIIGS, municipal defaults, etc.) that might still derail a fragile economic recovery. Buckle up.

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This is no time to come up short. It's time to fight like hell, as our namesake would tell us to do, for a democracy where minority rule cannot impose an extreme agenda, where facts matter, and where accountability has a chance at the polls and in the press. If you value our reporting and you can right now, please help us dig out of the $100,000 hole we're starting our new budgeting cycle in with an always-needed and always-appreciated donation today.

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