So, there isn't a lot of commentary yet, but the commercial bubble is in the process of popping. How bad is it likely to be? A lot has to do with the capital structure of the companies involved. If there's enough equity, companies will survive. If there's enough business, they may wipe out their equity in Bankruptcy Court, but nominally survive. The "Ahead of The Tape" column in the Wall Street Journal 4-28-09 had some good hints.

But, as to the commercial properties themselves, what might we expect? Here's the back of my cocktail napkin. Let's say that the property was regarded as "trophy" and bought at a bubble price. That might have been something that assumed 100% occupancy and was priced to yield 3%. So, that gives a starting point of reference of 33 (1/.03*). Now, if the occupancy goes to 90% and the expected yield to 5% that falls to 18, a loss of a little less than half. A yield of 6% makes it 15, a little more than half. Half of loan value wasn't an uncommon recovery for the savings and loan foreclosures in the '90's.

That said, those who could hold on through the early '90's often recovered their positions. Wells Fargo said in about '95 that it had worked out their problem loans and earned their cost of funds. For that matter there was an argument that those liquidation sales were "distressed" and not reflective of "real" market value. The sold properties were often vacant. The ones that held on were frequently leased. Today the argument might hinge on the credit of the tenants, but that's weak when even strong companies have high borrowing costs. After all, a lease is also a form of credit. Probably the question of how or whether to value a property will hinge on whether it HAS to be valued. If not, don't. Except, maybe, appeal the property tax value.

Those who bought the S&L foreclosures often did well. That might not be quite as easy this time. As Sam Zell said in the day, "Stay alive 'til '95. Be in Heaven in '97." But as of December, 2008 he was recommending investment offshore...

* Real estate "capitalization" is more or less the opposite of a price/earnings (P/E) ratio. The formula is Value = (net) Income / (capitalization) Rate, V = I/R.