Sounding the Alarm On Commercial Real Estate

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Below is a summary I wrote from the article "The Bigger Short: Wall Street's Cooked Books Fueled the Financial Crisis in 2008.  It's Happening Again."  We all have experienced the 2008 crisis, but it's best to reflect on the personal experiences we have seen on the streets and in the lives of our fellow Americans.

And if you would like to watch a video instead of going through the entire article:

The 2008 financial crisis was fueled by "liar loans."  Banks inaccurately stated borrowers incomes to guarantee loans to be accepted and ensure borrowers lower interest rates.  These loans were sold by the bank, pooled together to make mortgage backed securities.  Agencies rated these mortgages at a higher level, though they are considered "junk."  Many borrowers were delinquent on their payments.  This set a chain reaction of defaults and triggering the eventual downfall of the economy we know as the 2008 financial crisis.  

Fast forward to 2021.  Ryan Grim and Jon Scharwz report on the findings of John Flynn and some University of Texas findings of the commercial real estate market.  Lenders are continuing the "liar loan" tactic to ensure the lending process.  The biggest beneficiaries of these types of loans are large corporate commercial entities.  Banks are inaccurately reporting a businesses operating income; overstating their profit.  This inaccuracy is similar to the 2008 residential loan practices mentioned earlier.  By lenders overstating commercial business income, their loans will more likely be approved, as well as having a lower interest rate.  Commercial businesses can lower their costs, undercutting the local market.  Local businesses, some mom and pop shops in some cases, can't compete with these commercial businesses input costs.  One main driver of cost savings for a brick and mortar business is rent/mortgage.  If a business can save on this input, the business can lower its prices for a product/service vs the local competition.  A business can also afford wages, property taxes, utilities that these other local businesses could possibility not afford.

2020 brought the economy to a standstill for many enterprises.  COVID shut the doors of many brick and mortar businesses due to health and government restrictions.  Ryan Grim and Jon Scharwz report that lender CMBS's delinquencies are at 2008 levels.  This means that businesses haven't made mortgage payments.  This means that these loans are at risk of default.  

Mortgage Delinquencies

CMBS Delinquency Rates (Schwarz and Grim, 2021).


My personal thoughts on this matter:

Delinquencies in the commercial real estate market of 2021 can trigger an economic crisis.  If lenders have misrepresented business income to secure a loan, how can brick and mortar stores pay that back when (in most cases) their incomes were significantly lower in 2020?  Profit margins are often low in a competitive market.  Local businesses were hurt from the shut down.  Now, input costs are rising, property taxes are increasing, utilities are escalating.  The price of construction materials are skyrocketing.  For example, 2x4s increased from $2ish to almost $9, 3/4" plywood from $20ish to over $50 (in just a few months).  This seems like a perfect storm of delinquencies for businesses to force them to close their doors.  Employees will need to be laid off, increasing unemployment.  Currently, contractors cannot support huge service cost increases as raw materials edge higher.  Lower demand for all type of real estate (including residential) to come?  Time will tell if there is a bigger side to this story to be uncovered and issue a trigger.  Just remember, negative externalities happen in the economy.  2008 is the most prime example, often forgotten in our daily mundane lives.



Schwarz, Jon, and Ryan Grim. “Wall Street's Cooked Books Fueled the Financial Crisis in 2008. It's Happening Again.” The Intercept, April 20, 2021.