The commercial real estate crash will start to topple small town and regional banks in record numbers next year. Hundreds of banks are already dead men walking. The FDIC doesn't have the cash to take them all over unless it borrows from you and me. The Princeton Tiger four corner delay game won't work. Sheila Baer is going to need a bigger boat.

The Case-Shiller Index pegs the peak in national home prices in the summer of 2006, followed by a 34-month, 32% slide in prices. With the help of an $8,000 tax credit, the housing decline appears to have stabilized – that’s if you consider reliance on government subsidies a sign of stability.   

Commercial property prices, on the other hand, didn’t peak until October of 2007. Prices have since fallen further and faster than residential, suffering a 34% haircut just in the last eleven months. But the foundation of commercial real estate is just beginning to crumble:

• According to Deutsche Bank, $2 trillion in commercial mortgages will mature between now and 2013 in CMBS, banks and life insurance company portfolios, of which they estimate 64-72% ($400-$450 billion) of loans wouldn’t qualify to refinance were they to survive to maturity.
  
  
• The total delinquency rate was 4.1% at the end of Q2 2009, a 120% increase from March 2009 and a 450% rise since October 2008.
  
  
• Transaction volume is down from a peak of $133.2 billion in Q2 2007 to $4.8 billion Q2 2009.
  
  
• According to a Wall Street Journal analysis of regulatory filings, more than 2,600 banks and thrifts have commercial real estate loan portfolios that exceed 300% of total risk-based capital, the capital used as a cushion to cover losses. Regulators consider the 300% level a red flag for the banks’ health.

Rather than forcing banks to accept losses, regulators have permitted lenders to carry commercial loans on their books at pre-crash values, pushing the problem down the road in a strategy dubbed “Delay and Pray.” Banks can do their best to disguise their books, but there’s no hiding from the grim future for commercial real estate.