Zombie Commercial Real Estate Problem Growing

A potential disaster is in the making for 2010 with a growing inventory of zombie commercial real estate buildings occupying commercial developments nationwide. A rapidly rising tide of troubled loans for vacant or almost vacant commercial real estate threatens the survival of hundreds of the nation’s small and medium-sized banks. It is not a good time to be a commercial real estate developer or to be holding loans due from those developers.

Financial reports this month from federal regulators and industry analysts outline a new cycle of defaults in commercial real estate that they fear could cripple the economic recovery. Billions of dollars in commercial debt will have to be paid back or refinanced at a time when property values have plummeted and huge projects are underwater. According to the Federal Reserve Bank about $500 billion of loans will come due in 2010 alone and an equal amount every year through at least 2012.

Many banks that escaped the residential mortgage crisis are facing huge numbers of possible defaults by builders who erected thousands of office towers, condominiums and shopping centers with the easy credit available five years ago. With few tenants under lease and the prospect of finding new tenants almost nil, those developments are full of empty buildings that are turning into what industry insiders call zombie buildings.

Zombie commercial real estate projects funded by zombie banks is a potent combination for further disaster in an already weak economy. 2010 will likely be a year that will end any talk of a recovery back to the bubble days of pre 2008.