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Is Commercial Real Estate the Next Sub-prime?

Here are two clips from CNBC with pros debating the fate of commercial real estate.

The first features Jeffrey Schwartz, Prologis chairman & CEO and CNBC's Erin Burnett. The second is a debate on whether or not commercial real estate is the next subprime with Darrell Wheeler, Citigroup Global Markets; Howard Davidowitz, Davidowitz & Associates; Harvey Green, Marcus & Millichap; and CNBC's Michelle Caruso-Cabrera. (Thanks to Deal Junkie for spotting these.)

In the debate, Davidowitz cites figures from Goldman Sachs on estimated writedowns in the neighborhood of $180 billion. The same statistics were featured in an Wall Street Journal article yesterday.

(Click on the chart to make it larger)

WSJ_Chart

A team of Goldman analysts predicts the financial damage from commercial real estate could last as long as two years, which would mean "a significantly longer tail than subprime." That is because only 28% of commercial-real-estate loans have been packaged into securities since 1995, while about 80% of subprime loans have been securitized; the higher level of securitization subjects the subprime assets to more-immediate mark-to-market accounting, which is playing out in the form of the write-downs that are dominating headlines.

Wall Street has set itself up for a hard fall in commercial real estate. Banks and securities firms are facing exposure from loans and financing commitments made on commercial-real-estate projects, property they own directly and commercial-mortgage-backed securities that no one wants to buy.

How much worse the write-downs get likely depends on the economy. "If we go into a deep recession, as implied by the various indices looking at the fixed-income market, the write-downs could be bigger in coming quarters," says Richard Bove, an analyst at Punk Ziegel & Co.

These statistics reinforce the losses implied by where CMBX indices have been trading lately, something I wrote about a couple of weeks ago and that we reported on in our January issue.

Are things really looking this bleak?

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