With almost all assets worth less than when original loans were made, most bankers would not extend existing loans. They demanded more equity to offset lower asset values. But where could the borrowers get more equity? They could not borrow it from most banks, especially if they had very little equity left in their loans, and non-bank lenders had almost disappeared.

Vise tightens on owners

This situation creates a horrendous prospect for many owners of commercial properties with debts coming due in 2009 through 2011. Much of their initial equity has been wiped out by falling asset values. So they will have to put up more capital to renew their financing. But where will they get the necessary capital when most of the financial system refuses to keep lending at the volume it did when those loans were originated?

True, the federal government says it will provide some capital through TALF (Term Asset-backed Securities Lending Facility) to commercial property borrowers. But TALF will help only borrowers with AAA-rated properties and enough remaining equity to cope with lower property values and banks' reduced loan-to-value ratios.

That will leave thousands of property owners incapable of refinancing when their loans come due. Thus, deleveraging will inescapably inflict major pain on U.S. commercial real estate property markets in the next few years.

One partial remedy would be for lenders not to fully foreclose, but to pay the current owners to keep managing the delinquent properties and award them with a share of equity. That would keep present owners' interests aligned with the new owners' interests, and prevent the new owners from having to manage the properties involved. While it is not a great solution, it beats total foreclosure.

Tony Downs is a senior fellow at the Brookings Institution. He can be reached at tonydowns3254@gmail.com