The residential real estate market has been plummeting since the global financial crisis of 2008, and the number of foreclosures in residential real estate continue to rise. But some economists state that the real threat to the economy is the potential of massive defaults in commercial real estate. And it appears that commercial real estate is about to follow in residential real estate's footsteps.
According to a recent article in the Wall Street Journal, commercial real estate properties are going into default at increasing rates, and just like distressed homeowners, commercial real estate developers are walking away from paying for their properties. In some cases they're walking away, even though they have money to pay the mortgages.
Companies such as Macerich Co., Vornado Realty Trust and Simon Property Group Inc. have recently stopped making mortgage payments to put pressure on lenders to restructure debts. In many cases they have walked away, sending keys to properties whose values had fallen far below the mortgage amounts, a process known as "jingle mail." These companies all have piles of cash to make the payments. They are simply opting to default because they believe it makes good business sense.
While banks have been railing against desperate homeowners for "strategic defaults", claiming that residential homeowners have not only a legal but moral obligation to pay their mortgage when they have the funds to do so, this apparently does not apply to the commercial sector.