Commercial Mortgage Storm

When Peter Lynch was the guru of investments one of his tenets was to just  look around. He said he made many of his stock picks based on what he saw on the street, products he bought, and buzz from friends. 

If you want to know what's coming in the commercial mortgage market, follow Lynch's theory. The home mortgage problem didn't happen overnight. It started slowly and blossomed fast.

Near my home in Arizona is a strip shopping center that opened 7 years ago. It was built on the come. Growth was exploding in the area and as the area grew, the demand for this shopping center would come. Get in early while property values were lower and ride the wave. This shopping center has never been more than 50% occupied. Some growth came but it stopped. To compound the problem, two more strip shopping centers were built within 2 miles of this one. Neither of them has even been more than 25% occupied. 

Some banks are holding the mortgages on these three properties. Rents aren't coming in and interest is due. Someone is going to default soon on all three of these properties since the growth can't possibly come soon enough now to save any of them. Plus, the first one is now entering the maintenance phase. No money set aside from the depreciation to do the maintenance, means maintenance won't get done. 

And, the few tenants they have are all trying to renegotiate rents, since there is limited traffic in the centers and their business is suffering. 

In established shopping centers, vacant stores are cropping up every day. There is some hope for these centers if an economic turnaround comes. But, it need to come fast. A closed store is like a foreclosed house in a subdivision. It hurts the value of all the stores. Five closed stores and you have a very sick shopping center.

Banks aren't saying much about this ticking time bomb, but they have to be sweating bullets. Payments have to be falling behind and bankruptcies are going to happen. What strain will this place on banks that are already" tarped" because of the sub prime mortgages?

This is going to blow and blow soon. Like Peter Lynch said, just look around you.