Fortunately for President Obama, he didn't have to deliver the State of Commercial Real Estate Address last night...

Because if he did, there is no amount of spin that he could have used to put a good face on the reality of the situation: commercial real estate is a disaster in the making.

In fact, that point was only underscored earlier this week when the owners of the Stuyvesant Town apartment complex announced they would default on the $4.4 billion in loans they used to buy the property at the peak of the commercial bubble.

Now, some four years later, that deal has soured just like the rest of them, as falling rents and plummeting real estate values have turned their big purchase into a no-win situation for everyone involved.

~~ad_0~~

That left Tishman Spenser and Blackrock with their only option: handing the keys back to the lender after missing a $16.1 million interest payment and watching the value of their property fall 65% from the peak.

Left with a property now worth only $1.9 billion, they simply threw in the towel in one of the most expensive cases of jingle mail on record.

2010 Commercial Real Estate Forecast

But let's face it, the Stuyvesant Town debacle is just one of the many strategic defaults headed down the pike right now, especially in a down economy.

In that regard, says Aaron Bryson, an analyst at Barclays Capital, "Stuytown is a poster child for the type of aggressive lending that characterized CMBS at the peak of the market. This is a prime example of these types of loans not working out, and we expect a lot more to come."

Unfortunately, Bryson is not alone...

FDIC Chair Shelia Bair expects the rates of delinquent CRE loans to continue to rise "in the coming quarters," and she reiterated her belief this week that many more bank failures will occur as a result.

What's more, she says: "There's not a whole heck of a lot we can do about it."

In fact just last Friday, regulators shut down five more banks in New Mexico, Oregon, Washington, Florida, and Missouri — bringing the count of U.S. bank failures so far this year to nine.

And guess what? Commercial real estate losses were responsible for a majority of those failures, according to the Federal Deposit Insurance Corp.

"A lot of them were saddled with commercial real estate loans that went sour. You couple that with weak regional market conditions, and that was a recipe for failure for many of those banks," said Greg Hernandez, a FDIC spokesman.

The Perfect Storm

That trend will undoubtedly grind on as the defaults quicken their pace. Over the past year alone, delinquent CRE loans on income-producing properties have risen by 250% to $44.8 billion.

"Not since the early 1990s have we observed this perfect storm of deteriorating rents and occupancies, deflating sales prices, and tight credit that's leading to a lot of defaults," writes Victor Calanog, director of research at New York-based real estate research organization Reis. "With close to $3.5 trillion of loans outstanding and at least 12 to 24 more months of rent declines, I expect to see more commercial properties defaulting on loans."

But despite this "perfect storm," commercial REITs finished the year strong along with the rest of the markets since reaching a low point on March 6.

According to NAREIT, the FTSE NAREIT Equity REIT Index was up 7.15 percent in December, with total returns of 27.99 percent for 2009.

That has been enough to remind investors that just because something is inevitable, that doesn't mean it's imminent; this is why the commercial real estate sector has confounded the bears since the March bottom.

However, those days may be beginning to wane, since the situation on the ground has gone from bad to worse.

In fact, here's a look the most recent headlines from the shrinking sector:

Now does that sound like a sector that is going to have a miraculous recovery anytime soon?

... Of course it doesn't. And those headlines are just a few of the many out there.

In fact, practically every single commercial real estate analyst thinks that — over the course of the next two years — the sector will get much worse before the market bottoms sometime in 2012.

That being said, there are a whole host of reasons for this sector to collapse; on the flip side, there is only one reason for it to go up.

But it's a pretty big one: The Fed's wall of liquidity — which can't go on forever.

In fact, even by the Fed's own admission, its helping hand will return to its pocket over the course of the next six months. When that happens, CRE will fall even further all the way into 2012.

Those are facts that can't be glossed over.

The good news: There is an upside to all of this coming turmoil. To learn more about how to profit as commercial real estate tumbles, click here.

Your bargain-hunting analyst,

Steve Christ, Investment Director

The Wealth Advisory

~~ad_0~~