A Slow-Motion Wreck for Commercial Real Estate

The residential real estate bust has been a slow-motion wreck too. (It started in 2006!) But the commercial meltdown will take even longer for two main reasons. One is that while commercial real estate lenders certainly got sloppy during the boom, they didn't go utterly crazy the way their residential peers did. Commercial lenders still demanded down payments and evidence of income. They didn't factor in a 40% decline in prices or the worst economic downturn in 70 years. The housing bust preceded and precipitated the recession. The commercial bust is an aftereffect. (See 25 people to blame for the financial crisis.)

The other big difference is that while most residential mortgages are chopped into securities and sold, the bulk of commercial mortgages — and virtually all land and construction loans — stay on banks' books. Banks have leeway to delay recognizing losses on these loans — that is, they don't have to "mark to market." With banks facing total commercial real estate losses of $200 billion to $300 billion or more by Parkus' estimate, regulators have so far encouraged banks to exploit that leeway. (See the financial crisis after one year.)

The upside of this approach is that it gives banks time to work out problem loans in an orderly fashion. It also averts a big hit to the FDIC's empty insurance fund. The downside is that it drags out the correction for years, delaying any rebound. "The smart money, and there is plenty on the sidelines, is waiting for the bottom to materialize," says Bonney. It may still be waiting a year from now.

See The Curious Capitalist for Fox's daily take on business and the economy.

See the top 10 photos of the year.

See a week-by-week news chronicle of 2009.