Will the government have to bail out the commercial real estate market?

A weird quiet seems to have settled over the country. We're in the midst of the financial crisis, yet it feels like the whole thing has somehow passed. In fact, the ionized air around us suggests we're in the eye of this hurricane—experiencing a moment of calm before the storm whips up again.

Which is to say we are probably experiencing a "rolling recession." And some analysts believe the crisis has yet to fully ripple across the myriad types of assets held by banks and investors. The failure of residential mortgage-backed securities was just the first ripple of this much larger wave. Asset types that didn't exist on the same scale in 1929—like credit cards, industrial loans, and commercial real estate—still hold the force to wreak more havoc. And on the tip of Wall Street's and Washington's tongues are commercial mortgage-backed securities. They sure look like the tsunami in this financial storm. But it might just be the Geithner plan that halts the wave and saves our shopping malls from looking as dead as some suburbs.

So first, why do CMBS have to blow up? Like residential mortgages, the premise behind commercial loans was faulty. And that premise is, of course, that the market would never go down. Commercial loans, which are packaged into CMBS, are given to owners of buildings that have multiple streams of income, like apartment complexes and shopping malls. Unlike residential mortgages, their terms are as short as five years with a lump-sum payment due at the end. In residential mortgages, only savvier homeowners—well, they seemed so at the time—thought to treat their homes like cash machines and take out equity in the form of refinancing. But in the commercial market, especially the crazed one of 1993-2006, it was de rigueur to refinance loans and pull out equity before the big payout came due.

Thanks to that practice, America's $6.5 trillion commercial real estate market, of which nearly 50 percent was financed, may be in dire straits, too. More than half a trillion dollars in commercials mortgages are coming due between now and 2011 (which is five years out from the market's 2006 peak). And just like the homeowners who never expected to actually face their balloon payments, the frozen credit markets are leaving commercial loan holders unable to pay off their loans. Delinquencies in CMBS loans are already up 246 percent over this quarter last year, and analysts say they could go much higher.

Real estate investment trusts are built on commercial loans, which are often packaged into CMBS. REITs are a special type of company that allows investors to avoid corporate income taxes if they distribute 90 percent of their profits back to investors, usually as a dividend. Which is why it was scary for many of those investors to watch General Growth Properties, the largest REIT in the country, declare bankruptcy last week. The company, which owns 200-plus malls, faces $5.5 billion in commercial real estate loans due in two years. Basically, it was hugely overleveraged. It has been a dead REIT walking for months—Sam Zell predicted the bankruptcy at a REIT conference in New York three weeks ago. But General Growth was holding out hope that it could convince its investors to simply hang in there—to give them an additional year to pay off their loans with no penalty either in a moratorium or a forbearance. Ultimately, investors said no, and here's why.

Analysts, media, and investors are lashing the commercial real estate sector with their tongues. Zell called it "Darwinian." Stock values of public REITs, despite a recent upswing, have been "routed," according to the Wall Street Journal. REITs are wrecks and have turned to the tenets of religion to survive: faith, hope, and charity. Their future is "clouded," according to one unusually sanguine headline writer. "Commercial Property Faces Crisis," says another.