A crisis is looming in the commercial property market both here and abroad. At present usually only reported in a low-key way in business pages or programmes, it seems likely to burst onto the scene in the near future, dragging the capitalist world deeper into depression and turmoil and causing untold suffering to workers. This commercial real estate crisis will pose further risks to an already unstable capitalist financial system and illustrate that its current financial crisis is nowhere near the end.
Over the next five years, about $1.4 trillion in commercial real estate loans will reach the end of their terms and require new financing in the USA alone. Nearly half of these are “underwater”, meaning the borrower owes more than the property is worth. A similar situation exists in Britain. Commercial property values in the USA, Britain and elsewhere have fallen more than 40 per cent since their 2007 peak. Vacancy rates are up and rents are down, further driving down the value of these properties.
There is a huge exposure of the banks to losses from commercial loans coming due in the next two to three years. Many of the problematic commercial mortgages were written at the peak of the property boom. Since then, the economic downturn has caused small businesses to fail, with shops and offices falling vacant. Many loans will inevitably be written down as losses, since the property valuations no longer support the outstanding debts. Of America’s 8,100 banks, 2,988 have potentially dangerous exposure to commercial property loans. The same applies to many British banks.
The impact could prompt further economic depression and cause a further squeeze in the availability of credit to businesses. Without new financing, properties face foreclosure, banks face insolvency, and businesses and renters in those properties face uncertainty. When commercial properties fail, the result is a downward spiral of economic contraction: job losses, deteriorating store fronts, office buildings and apartments, and more bank failures.
Defaults on residential mortgages played a key role in sparking the current financial crisis. Commercial property loans have taken longer to go sour but are emerging as an intractable problem for capitalism.
In the financial crisis of 2008-9, capitalist governments landed taxpayers with the bill incurred underwriting the toxic debts of the residential and real-estate sub-prime bubble. Are they going to hand over vast sums to protect against this larger, looming crisis? Isn’t capitalism proving too costly for workers? Shouldn’t we aspire to ditch it?