Guest Post: Consumer Deleveraging = Commercial Real Estate Collapse

Tyler Durden's picture

Submitted by Jim Quinn of The Burning Platform

Consumer Deleveraging = Commercial Real Estate Collapse

There is a Part 2 to the story of  Consumer Deleveraging that
will play out over the next decade. Consumers will deleverage because
they must. They have no choice. Boomers have come to the
shocking realization that you can’t get wealthy or retire by borrowing
and spending. As consumers buy $500 billion less stuff per year,
retailers across the land will suffer. To give some perspective on our
consumer society, here are a few facts:

  • There are 105,000 shopping centers in the U.S. In comparison, all of Europe has only 5,700 shopping centers.
  • There are 1.2 million retail establishments in the U.S. per the Census Bureau.
  • There is 14.2 BILLION square feet of retail space in the U.S. This
    is 46 square feet per person in the U.S., compared to 2 square feet per
    capita in India, 1.5 square feet per capita in Mexico, 23 square feet
    per capita in the United Kingdom, 13 square feet per capita in Canada,
    and 6.5 square feet per capita in Australia.

Despite the ongoing recession and the fact that consumers must reduce
their spending over the next decade, irrationally exuberant retail CEOs
continue their death march of store openings. Below are announced
expansion plans for some major retailers:

  • GameStop – 400 new stores
  • Walgreens – 350 new stores
  • Dollar General – 315 new stores
  • Ashley Furniture – 300 new stores
  • Target – 128 new stores
  • Starbucks – 100 new stores
  • Best Buy – 55 new stores
  • Kohl’s – 50 new stores
  • Lowes – 45 new stores

Retailers expanding into an oversaturated retail market in the midst
of a Depression, when anyone without rose colored glasses can see that
Americans must dramatically cut back, are committing a fatal mistake.
The hubris of these CEOs will lead to the destruction of their companies
and the loss of millions of jobs. They will receive their fat bonuses
and stock options right up until the day they are shown the door.

All of the happy talk from the Wall Street Journal, CNBC and the
other mainstream media about commercial real estate bottoming out is a
load of bull. It seems these highly paid “financial journalists” are
incapable of doing anything but parroting each other and looking in the
rearview mirror. Sound analysis requires you to look at the facts, make
reasonable assumptions about the future and report the likely outcome.
Based on this criteria, there is absolutely no chance that commercial
real estate has bottomed. There are years of pain, writeoffs and
bankruptcies to go.

Let’s look at some facts about the commercial real estate market and then assess the future:

  • The value of all commercial real estate in the U.S. was approximately $6 trillion in 2007 (book value, not market value).
  • There is approximately $3.5 trillion of debt financing these commercial properties.
  • Approximately $1.4 trillion of this debt comes due between now and 2014.
  • The delinquency rate for all commercial backed securities exceeded
    9% for the 1st time in history last month and has more than doubled in
    the last 12 months.
  • Non-performing loans are close to 16%, up from below 1% in 2007.

Do these facts lead you to believe that the commercial real estate
sector has bottomed, as stated in the Wall Street Journal? The Federal
Reserve realized the danger of a commercial real estate collapse to the
banking system over a year ago. They have encouraged banks to extend and
pretend. The website describes in detail what has occurred:

What has happened is the Fed has
allowed this shadow monetization of the debt and banks let borrowers
roll over CRE debt without even making payments in many cases!  Think of
an empty shopping mall.  There is no buyer for this in the current
market.  So why would a bank want to foreclose on the borrower? 
Instead, they pretend the asset is worth $10 million while the borrower
makes no payment and the Fed keeps funneling money into the banking
system.  In the end, the value of the dollar gets crushed and you end up
bailing out the banking system. Commercial real estate has collapsed
even harder than residential real estate.  This market is enormous in
terms of actual debt.  There is no official bailout on the books but it
is occurring through a slow and deliberate process.  Banks know that
they are essentially insolvent and they are dumping this junk onto the

 This grim story began between 2004 and 2007. The horrifying ending
will be written between 2011 and 2014. Commercial real estate loans for
office buildings, malls, apartment buildings and hotels usually have 5
to 7 year terms. If you thought the debt induced bubble in real estate
only affected residential real estate, you are badly mistaken. Before
the boom, a normal year would see $100 billion in commercial real estate
transactions. Between 2004 and 2007 there were $1.4 trillion of deals
done, with 2007 reaching a peak of $522 billion of commercial real
estate deals. Shockingly, the Wall Street banks, run by MBA geniuses,
loaned developers a half trillion dollars at the very peak in the
market. Sounds familiar. Thank God the taxpayer has bailed these
Einsteins out so they could live to make more bad loans and collect big
fat bonuses.

Commercial real estate prices rose 90% between 2001 and 2007, driven
by the loose monetary policies of the Fed and complete lack of risk
management on the part of the banks making the loans. Knuckle dragging
mouth breather developers built malls, apartments, offices and hotels
with abandon as billions of dollars rained down on them from Wall
Street. The consumer delusion of debt financed wealth led to the
developer delusion that 100% occupancy and increasing rents for all
eternity were guaranteed.

Commercial real estate prices have dropped 42% in just over a year.
This means that the $6 trillion value of all the commercial real estate
in the country has dropped to $3.5 trillion. The debt remained in place.
The billions in debt issued in 2003 – 2005 is coming due between 2010
and 2012. The underlying assets are worth billions less than the debt
that must be refinanced. Commercial loan payments by owners can only be
made from cash flow generated by rental income. A key requirement in
generating rental income is tenants.


Let’s examine the current state of vacancy rates for offices,
shopping malls and rental properties. The current office vacancy rate of
17.5% is the highest since 1993 and is just below the all-time high
18.7% in 1992. The WSJ has concluded, with no data or analysis, that the
vacancy rate has bottomed. As the employment data proves, companies are
not hiring employees. New companies are not being formed. Government
mandates and regulations regarding healthcare and uncertainty about
taxes will keep the formation of new small companies at a minimum.
Conglomerates continue to ship jobs overseas. Part 2 of this Depression
will drive more companies out of business. Office vacancies will remain
at record levels for the next five years. 

Office Vacancy Rate Q3 2010

Mall vacancies between 9% and 11% are at record levels. There is
absolutely no chance that these vacancy rates decline over the next few
years. With consumers deleveraging, wages stagnant, unemployment high,
and retail oversaturation, there are thousands of retail stores destined
to close up shop. Ghost malls are in our future. They will come in
handy as homeless shelters and soup kitchens. Mall developers will be
defaulting in record numbers.

Mall Vacancy Rate Q2 2010

Apartment vacancy rates peaked at 11% in 2009, the highest level in
history. With millions of vacant homes and millions of available rental
units, rental rates will stay low for years. The cashflow of apartment
developers will under stress and will lead to more loan defaults.

Rental Vacancy Rate Q2 2010

Based upon the current rising delinquency rates of 15.7% for
commercial real estate loans and 9.05% for CMBS, there is no bottom in
sight. Only raging mindless optimists like Larry Kudlow could ignore the
facts and conclude that all is well in commercial real estate world.
Banks pretending that the loans on their books aren’t worth 40% to 50%
less, while also pretending that borrowers with negative cash flow can
make loan payments, is not a solution. It is a Federal Reserve
encouraged fraud. Allowing loans to be rolled over with no hope of ever
being repaid will only prolong the pain and delay the inevitable. 

The facts are that hundreds of billions in commercial loans are
coming due, with a peak not being reached until 2013. If banks were to
properly account for the true value of these loans, hundreds of regional
banks would be forced to fail. This is unacceptable to government
authorities. They will insist that the fantasy continue. Banks and real
estate developers will pretend to be solvent, hoping the economy will
miraculously repair itself and eventually make them whole. I understand
these bank CEOs and delusional developers also believe in Santa Claus,
the Easter Bunny, and the Efficient Market theory. It seems our entire
financial system is based upon debt, fantasy, fraud, and delusion.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Hephasteus's picture

10/10/10 and dad is bringing back the bullshit

America's are going to spend 447 billion dollars this holiday season. Srsly!!!

That's 1500 bucks per man woman and child. Take out the 30 million unemployed and it's 1650. It's going to be an ounce of gold christmas.

DavidPierre's picture

Smokey Quinn understands nothing of these BANKER/CIA/MAFIA/CEOs and their ilk. 

Nice fancy photos, charts and graphs... but he is more delusional than the commercial developers ever thought of being. 

Smokey Quinn believes the "Official" 9\11 Lies, Santa Claus, the Easter Bunny, and the Efficient Market theory.

It seems Smokey Quinn's entire financial belief system is based upon intellectual deficit, fantasy, fraud, and delusion.

Smokey Quinn blows more smoke than Suzy Welch.

SMOKEY QUINN is up to all sorts of tricks ... cut and paste... plagiarism... but especially obscene racism, posted under his various AKA's...etc.



Beware!...  Stay out of his manure paddock/blog as Smokey Quinn has a strong sexual preference for his sheep. 


Hephasteus's picture

And the cheese slides off another cracker.

DavidPierre's picture


If you really want to wallow in some of the shit Smokey Quinn was running at his blog go back and check out one of his classic racist rants.


I won't repost it here. 

Since I posted it on ZH, Smokey Quinn later deleted HIS RANT off his sheep paddock site. 


Jason Rines, Smokey Quinn's former webmaster...

"Smokey and Jim are the same people, yes. I mapped both the I.P.'s back to his office at Wharton."



Hide yourself in shame MORON!    But...

You will always have 'your sheep' who will still respect you in the morning.



John Bigboote's picture

If he is racist does that mean he is wrong about CRE?

Hephasteus's picture

I still don't know why he's blowing this crap at me.

Hey have you seen John Smallberries? He hasn't reported in for a while.

Jim Quinn's picture

How sad is your pathetic little life that you must troll discussion boards spewing your hate? I guess being an American traitor really must wear on the conscience. Time for you to go back and watch JFK for the 40,000th time and pray for another 9/11. Enjoy your pathetic little life in your shack deep in the woods of British Columbia where men are men and sheep are scared.  

laurie's picture

Anyone who has read Jim Quinn's blog for the past year or two knows that this DavidPierre (DP) guy is a nutjob who lies and spams with nasty comments and photos.  This is because Jim disagrees with DP, who thinks 9/11 was pulled off by our own government.  Honestly this obsession with Quinn makes DP look like a very sad, pathetic human being.

i-dog's picture

"Jim disagrees with DP, who thinks 9/11 was pulled off by our own government. "

Then Jim's as dumb as a doorpost!

Smokey1's picture

Of the thousands of members of Jim Quinn's site, many comment regularly. All of the regulars are keenly aware that Quinn and Smokey (me) are two different people. David Pierre is aware of that also, but DP does not have much regard for the truth. Quinn allows an extremely wide range of free speech on his site, and occasionally the comments I(Smokey) have made could be construed as racially insensitive. Again, those words are MINE (Smokey), not Quinn's. DP has a habit of attributing my (Smokey's) remarks to Quinn. Quinn won't let DP on his site because DP continues to spam it with 9/11 conspiracy nonsense.

DavidPierre's picture

Smokey Quinn:

You just cannot help yourself MORON.

Now you post under an aka on ZH.

Explain why you take down long standing and obscenely racist, "Smokey", comments off of the '30 Blocks of Squalor' thread if they were not yours?

Every one is a Liar and should Fuck Off... except you.




Smokey1's picture

DP---Your lies are transparent. ANYONE is free to easily look at any of the past articles on Quinn's site and see the MANY nasty arguments I've had with Quinn over this country's military policy. His belief that Ron Paul could save this country and my belief that we would be speaking Russian in this country before the end of Ron Paul's first term. But of course you already know that, but can't refrain from your psychotic drivel. Why don't you give it a rest? Everybody knows you are a deluded fool and in severe need of professional psychological evaluation. Again, to expose your sick shit, all anyone has to do is take a few minutes and check out the past posts on TBP. You are a liar and a fraud. Seriously, DP. Get help.

-Michelle-'s picture

I'm waiting to see how many of those idiotic "Lexus in the driveway wrapped in a bow" commercials there are this year.

Almost Solvent's picture

Buy a Lexus.

Get it giftwrapped for free.


frankTHE COIN's picture

A massive amount of these loans were the equivalent of Interest Only payments for years until the resets begin. Now that the resets are here ( no consumer buying, thus no profits ) the adjusted new payments are multiples higher.

Warm up the bankruptcies !'s picture

got. COIN morning do you people ever sleep? really how do u do it. goin  pick up the horn.

frankTHE COIN's picture

On California time. It was a coincidence.

Mr Lennon Hendrix's picture

We should turn strip malls into homeless shelters.

Almost Solvent's picture

Carl Paladino running for gov in NY wants to put welfare recipients & the homeless into underutilized prisons for personal hygiene & how to work lessons.


Of course he should have thought of empty strip malls first, then he would not have been attacked as racist, etc.  

i-dog's picture

I think FEMA already has the fences and guard towers on order.

gwar5's picture

I fear for commercial real estate. We're all in trouble if this gets worse. Which means it will.

tip e. canoe's picture

not if you own a skateboard.

Caviar Emptor's picture

Will Washington go to bat for CMBS holders and banks again? And again? 

Going back to the well won't be quite as rewarding. There'll be winners and losers in the game, but that's enough to spook markets for a while. I wonder how much high yield debt is hanging in the balance. 

In the next phase of societal collapse a la Orlov, State governments seize vacant commercial property for use as no income housing. 

Miles Kendig's picture

Allowing loans to be rolled over with no hope of ever being repaid will only prolong the pain and delay the inevitable

While doing so allows the party to go on for an even greater period of time.  Everyone knows that the primary responsibility of an "independent" central bank is to know when to take away the punch bowl .. er .. keep the hopium flowing.  And with the vice of vice herserlf Janet Yellen now on the job there will be free dope for as long as government and the banks want it.

traderjoe's picture

"They will receive their fat bonuses and stock options right up until the day they are shown the door."

Here, let me correct that for you:

"They will be allowed to resign with their $100 million severance intact after a little dust up with some expense reports and a DD-list 'movie' star, and then get hired promptly by a direct competitor who will offer a multi-million signing bonus." There, that's a bit more accurate. 

Nice article. I don't we will make it the 10 years to de-leverage. System imploding in 3...2...1....

AUD's picture

Much the same here in Australia, I live not far from a smallish country town, hardly boomtown & it has plenty of vacant commercial real estate.

The consumer is not deleveraging though, as you say, the value of the dollar gets crushed and you end up bailing out the banking system.

i-dog's picture

Australia can just keep digging shit up (or chopping it down) and shipping it out to anyone with Yuan, Yen or Rupees. That should keep the Aussie Ponzi going quite a bit longer than for EU and US.

Caviar Emptor's picture

Breaking: Vietnam may reverse gold import ban.

StychoKiller's picture

With Gold quoted at $1363+ as I type this, sounds like there's no "may" about it!

cranky-old-geezer's picture

" ... that will play out over the next decade."

Bullshit.  It's going to collapse in 3 years tops ...along with lots of other stuff.

I get so sick of hearing "in ten years", those folks don't have a clue how bad things really are and how quickly it can all come down.

Popo's picture

Yes. True.  It *should* all come down quickly.  But if there's one takeaway from what we've seen so far:  The powers that be are *much* better at extend and pretend than anyone thought possible.

I was banging the drum for 'imminent collapse' for a long time.  Now, the truth is: I have no idea "when" shit will fall apart.  

I'll say this about our mutual enemy:  They're good.




kaiserhoff's picture

Well said, Popo.  As long as they can keep banks open with negative equity, and whole states ignore their own bankruptcy, this damn fraud rolls on.

We got a bit of rain on the coast recently.  It was fun to see so many for sale signs sitting in 3 inches of water.  Many of those signs are changing to "must sell."

Maybe, someday, there will be justice in the world.

Xibalba's picture

Customer Al Thomas added, "I was driving down the interstate and saw the sign that said Bass Pro open and I said, 'I‘ve got to come in and get some stuff!'  Even stuff I don't need, I'm going to buy something." -

-Michelle-'s picture

I'm sorry, Xibalba.  I thought you made that quote up.  I clicked on the link and read the story and now know that you didn't.  My apologies.

God help us all.

Oh regional Indian's picture

A reading of the last weeks headliners at ZH looks eerily like a slow-motion domino collapse.

Stux, Bunds, reel estate, sovereign defaults, lies, gloom....

Interesting times indeed. Add 10/10/10 (is the UK a target again, a la 7/7/7?, all the "alerts" seem to point that way).

And in case anyone forgets, the UK is/was the US's mother ship. I know, sucks, but true.


fresbee's picture

There my Gold bugs is dreaded news for ZH:


Japan says it wont devalue its currency.


Unfortunately when I was talking about this a few days back in comments, ZH was mocking me. There is only one country and its crony who will be involved in the devaluation process but even before they are half way through the devaluation, the whole world esp Chinese and Russians will corner them or engage in military to force the US into austerity which will absolutely bankrupt the US and UK (Only US,UK and not EU which will emerge as the super power of the new century even with PIIGS who will look healthy compared to pale US and UK economies in late 2011/12. 


EURO is well on its medium term target of 1.6 and then surge from there.


Gold bugs! Am sorry, no place for you. You will hold that metal to your grave and will die poor. :)

Caviar Emptor's picture

Let me understand: before we get to nirvana we'll have killer competitive devaluation of the dollar followed by military intervention and US/UK bankruptcy....and you consider that gold-bearish??


If the world economies devolve into war, the ONLY place for safe placement of wealth will be gold since all bets and rules of business are off, chaos prevails and nobody can tell what the world will look like in the other side. When entire governments can topple, fiat money becomes like Monopoly money: based on the full faith and credit of nobody.

I'll take my money in gold under that scenario and have a fighting chance to take it with me anywhere I go knowing that everyone else is thinking the same thing and in a world craving stability and safe wealth preservation.

fresbee's picture

".and you consider that gold-bearish??"


I hold Gold paper buddy. Get the theory correct. Gold is an anti dollar trade but not end of fiat currency trade. So EURO 1.6 will far outperform Gold at 1400. I dont ever see Gold at 2000. Before that Gold will crash against euro. Dollar may not survive more than 2 years.

Hephasteus's picture

Like a firefly with his ass stuffed in a chunk of coal.

Popo's picture




Hephasteus's picture

Look dipshit. Devaluing currency changes the leverage ratio's of gold. It can't go from 100:1 to 200:1. It's going to frikkin crash.

Mock. Mock. Mock.

They can devalue the currencies just by unraveling the lies a bit as you are starting to see many nations CHANGE thier gold reserve numbers for NO APPARENT reason. But if any TRUE QE hits that requires moving gold reserves or clearing international settlements. The system will crash with threatening phone calls about tungesten and send me my gold bitch.

Jendrzejczyk's picture


“It’s not our intention to engage in a currency- devaluation race for the sake of the national interest,” Igarashi said in an interview in Tokyo today. “We could conduct smoothing operations when movements are extremely volatile, that would be permissible.”

It's not an intervention,'s a "smoothing operation."

Can't. resist. feeding. seagulls. at. boardwalk.

The Navigator's picture

'They' say they will not devalue but issuing Trillions in Yen to make exports competitive IS devaluing their currency. The truth is Japan (and all other sovereign Central Banks) will continue to print/issue trillions more to save their exporters as other countries race to the bottom in printing Quadrillions. I won't have to wait til grave time to wave my shinny metals in the face of impoverished fiat paper holders to get the last laugh - in fact, I don't expect to wait more than 2 years for the collapse. Where the hell is Johnny Bravo?

Chappaquiddick's picture

Buddy, I hope that you're right, but I think that you're not - the only thing going for the US economy at the moment is the size of the US Military.  The spectre of deflation may result in the US adopting some rather novel economic stimulus packages.  As war is the great inflater, I think the death throws of the Republic will initiate the greatest inflation surge of all.


Diogenes's picture

Let your soldiers dig for gold with their bayonnets. The cost of the military is dragging you down more than they are propping you up.

Seriously, what is your military going to do? Drop an A bomb on Peking? And that is supposed to make them help you?

Chappaquiddick's picture

It'll be about what it's always about: oil and other precious natural resources.

It'll be couched in terms that average Joe understands: Good guy's vs bad guy's.

It'll be executed sanctioned by the Senate and adorned by the Flag.

God Bless America and God help us all!