Before taking a closeup look at Sacramento, please consider a snapshot of commercial real estate in general. MarketWatch is reporting Commercial mortgage failures threaten system: overseer.

Over the next few years, a wave of commercial real-estate loan failures could threaten America’s financial system, and in the worst case scenario, hundreds of additional community and midsize banks could face insolvency, a congressional watchdog group said Thursday.

According to a report by the Congressional Oversight Panel, a watchdog group for a $700 billion bank-bailout package, about $1.4 trillion in commercial real-estate loans will reach the end of their terms between 2010 and 2014, of which nearly half are now under water (that is, the borrower owes more than the underlying property is currently worth).

The report added that losses from commercial loans could range as high as $200 billion to $300 billion.

As a result, it said, banks that suffer from the losses or are discouraged by the economic future could become even more reluctant to lend, which could reduce access to credit for more businesses and families, accelerating a negative economic cycle.

“The Congressional Oversight Panel is deeply concerned that commercial loan losses could jeopardize the stability of many banks, particularly the nation’s midsize and smaller banks, and that as the damage spreads beyond individual banks, that it will contribute to prolonged weakness throughout the economy,” said the report, which was approved unanimously by the five-member COP.

Commercial real estate woes are everywhere you look, but Sacramento, California is ground zero of the ongoing bust. It will take years if not a decade to fill vacant businesses in greater Sacramento.

The Sacramento Bee notes the sad state of affairs in Region’s shuttered stores tell a thousand stories.

An empty shell occupies 9,500 addresses across the Sacramento region – one closed business for every six still open, according to a Bee analysis of U.S. Postal Service data. That’s more dormant businesses than in 17 entire states, including Utah, Arkansas and New Mexico.

And it’s vivid along Main Street in Woodland, where Jill Caunedo happily ran a bagel and coffee shop – until about two weeks ago. “Thirty percent of all the businesses (on Main Street) are vacant,” Caunedo said, adding that she is left to sell her former cafe’s equipment for a quarter on the dollar.

Caunedo, the former cafe owner, tries to remain upbeat, but she also sees little reason for optimism. This recession, she said, changed people, made them realize they could do without things like professionally prepared lox slices and mocha lattes.

“Everyone,” she said, “is perfectly content with getting by with less.”

The words “perfectly content” might be a bit of an exaggeration.

However, from millennials, to boomers to recent graduates deep in debt with no job, and even for those lucky enough to have a good job, content or not, “everyone is getting by with less, with no plans to change.

That is precisely why the Fed’s efforts to reflate will fail.

Mike “Mish” Shedlock
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