The national business media has turned its attention to what is characterized as the "second wave" of delinquencies occurring in the commercial sector - a term meant to include retail, office, industrial and other commercial projects. The condition is so severe that the analysts have characterized failing commercial mortgages as capable of "wiping out" what is left of the financial sector. That is a very serious prediction.

They note that more than $2 trillion in commercial mortgages will mature before the end of 2013, and the market forces that battered the housing market will do the same to commercial properties. Furthermore, it's noted that a substantial number of commercial loans are in default. The riskiest component of the equation is construction loans.

According to some commentators, construction loans are held disproportionately by smaller banks and most vulnerable to failure. With proformas that justified the loans evaporating (no real tenants), the lender is faced with adding to its inventories of homes, empty shells of completed commercial buildings and skeletons of buildings under construction. Some commentators state that the downward spiral will continue till it comes full circle to when the federal government stepped in with TARP and other rescue programs, to counteract the housing crisis. These commentaries are braced with huge numbers to support the scenario, but like all the figures floating out there - they are too large to put in perspective, let alone comprehend.

The question this poses is obvious: What do these predictions mean for Phoenix? At this point, a good bet is that as bad as the commercial market is in Phoenix, it's unlikely that it will drag financial institutions into collapse. There's no doubt that there are too many vacant houses, too few jobs and flat personal income, with an inevitable effect on commercial properties - particularly retail and office. Vacant homes and stressed consumers simply mean no business - and no business means no occupancy - and the dominoes all fall, with the financial institutions left as the last ones to topple.

But Phoenix is a large market, with pockets of some - if not strong - activity. It's also resilient and a target for cash investors waiting on the sidelines. In fact, there appears to be enough cash that, if freed, could salvage enough of the market to keep it alive - perhaps on resuscitation, but not dead. There's evidence of this already moving into the Valley.

There's no doubt that lenders are beginning to realistically assess their inventory of loans - those that are salvageable and those are not. Many lenders are concurrently following two tracks, with the hope that the negotiations will succeed:

  • working out negotiations
  • aggressively pursuing foreclosure

Another phenomenon that may account for some measure of optimism is that the risk appears to be distributed among a large number of banks, both in and out-of-state. The failure of one project here does not signify a collapse of an institution.

In short, there are those who predict a doomsday brought on by the collapse of commercial loans dragging the lenders down with it, and include some impressive numbers to support their viewpoint. However, for those executives that may not like what they see - it should not send them ducking under the desk. An optimist at heart would see there is still water in the glass - regardless of whether it is half full or empty - and share some measure of confidence that we will still be around when the commercial market turns.