Almost forgotten in the mess that’s the American economy has been commercial real estate. Forgotten by the press but certainly not by the market participants it is now poised to be the next body blow that the economy has to endure.

An article in the New York Times does a really good job of introducing the emerging problems to the general public. It points out that default rates have been artificially low and that, in fact, the problem is now one that amounts to well over $100 billion.

For many months now, the commercial real estate industry has been grim about its future, but it has been hard to quantify just how bad things are. The default rate for loans packaged into securities and sold on Wall Street has remained well under 1 percent, yet today that low figure is considered highly misleading.

Now a New York research company, Real Capital Analytics, has compiled data showing that at least $107 billion worth of income-producing property — including hotels, offices, apartment complexes and warehouses — is already in distress or is headed in that direction.

Personally, I think that the $100 billion number vastly understates the problem and if the economy doesn’t recover quickly it could balloon dramatically. Complicating the situation is that the financial institutions that hold the debt on this real estate are in no position to renegotiate loans and push the problems off to a better economic climate. In addition, the securitization market has been obliterated so there is virtually no way to work out the problem credits.

This one will prove particularly thorny for the Fed and the Obama administration to attack. Conceptually, it’s not hard to work through commercial real estate problems but politically it’s going to be dynamite. You just can’t justify bailing out some new casino in Las Vegas or hotel in New York when the owners are mega bucks types. If you thought the Detroit crowd were inept when they took their jets to D.C. just wait until the public gets an eyeful of the commercial real estate crowd.

This is one more development that we really don’t need.

See the post below for some further comments.