The Next Shoe

So what’s the next shoe to drop? In my opinion, it’s commercial mortgages.

Residential mortgages are loans you take to buy your home. Commercial mortgages are loans that a developer takes to buy a commercial building. Commercial real-estate is a lot different than residential property. For one thing, it’s tied a lot closer to the economy. For another, high-end marquis properties like big-city skyscrapers usually hold their value.

Until now. Recently Boston’s John Hancock Center went through a bankruptcy auction and sold for $660 million. That’s about half the value it went for 36 months earlier. In the mean time we’ve had an economic crunch in finance-a major part of Boston’s economy. That’s created vacancies in downtown office buildings, which has pushed down their value.

Add all this up and we’re not out of the woods yet. That’s what the market has been saying the past couple days. During the first quarter the banks proved that zero interest on deposits and 4% on loans means they can rake in earnings. Let’s hope they can earn enough to stay ahead of the curve.

Douglas R. Tengdin, CFA
Chief Investment Officer
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