Commercial Real Estate Collapse: Only a Matter of Time

For the past six months or so, Wall Street has been bracing for what many fear may be the next shoe to drop on the already battered U.S. economy: a U.S. commercial real estate bust that could rival the housing market collapse.

Yet, lenders have been keeping that shoe in the closet — forestalling foreclosures by extending loans, despite rapidly rising mortgage default rates.

Lending is based on a percentage of a property’s value and prices are off 34.8 percent from their peak in October 2007. Many see the decline reaching 45 percent. But banks have been loathe to foreclose on the mortgages and are extending them.

About 4.5 percent of bank commercial real estate loans were 30 or more days delinquent in the second quarter, up from 3.6 percent in the first quarter, according to Foresight Analytics. Nonaccrual – or the percentage of the loan balances that banks believe borrowers will fail to repay — rose to 2.6 percent in the second quarter from 2 percent the prior quarter.