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There’s a new main character moving to center stage in the great real estate meltdown. Underwater homeowners vying to refinance or score a loan modification have grabbed much of the headlines (and bailout attention) to date. But now commercial real estate is moving into the spotlight as the next potential body slam for the economy.

Last week The Washington Post reported that the U.S. Treasury department has begun to contemplate what can muck things up for the economy and the recovery beyond what is currently being bailed out. This effort has come to be known as Plan C. As in, “Yikes, Plan B might not do the trick, so what do we need to focus on next?”

Reports the WaPo, "The officials in charge of Plan C -- named to allude to a last line of defense -- face a particular challenge in addressing the breakdown of commercial real estate lending.”

The story line reads like a sequel to the residential debacle: Commercial property owners are sitting on loans that need to be refinanced. The Real Estate Roundtable estimates that about $400 billion a year in commercial loans will need to be refinanced over the next decade.

But with commercial property values way down, vacancies way up, and the recession making it unlikely there will be a demand pick-up anytime soon, banks haven’t been inclined to offer refinancing deals. If they do open the spigot at all, the terms are nowhere near as cheap as what commercial property owners had enjoyed during the boom. Sounds familiar, eh?

Earlier this month, in testimony before the Congressional Joint Economic Committee, Jon D. Greenlee, the Fed’s associate director of banking supervision and regulation, summed up the Plan C worry: “At the end of the first quarter [of 2009]," he testified, "about seven percent of commercial real estate loans on banks’ books were considered delinquent. This was almost double from the level a year earlier.”

Greenlee says there is about $3.5 trillion of outstanding debt associated with commercial real estate, and banks had about $1.8 billion trillion of that tidy sum on their books. That computes to about $126 billion (so far) in delinquent commercial mortgages on the banks’ books.

Now if you’re Goldman Sachs, you might be able to absorb commercial real estate writedowns (
reportedly of more than $1 billion
) with record trading profits elsewhere. And, to be sure,
the vultures are already circling
in the hopes of picking up distressed commercial property.

But if the squeeze on commercial real estate is as persistent and pernicious as what we’ve seen in the residential market, it wouldn't exactly be a shock if the government beefs up its support/bailout. Get your taxpayer dollars ready for Plan C.