Since the beginning of the housing downturn almost 3 years ago, many have wondered whether commercial real estate would follow residential into the abyss. Professor Zucchi has long been saying that it’s just a matter of time.

The bullish case for commercial real estate argues the business is less prone to bubbles than the residential market, since asset prices are more directly tied to cash flow. Even if vacancy rates rise, commercial property values won’t take the drastic hit we’ve seen in residential, since there wasn’t a huge speculative run-up in the first place.

While this line of thought is logical, it ignores the structural similarities between the 2 markets. During the boom, both residential and commercial mortgages were funded by originators using cheap short-term debt to finance long-term loans at higher rates. Since that short-term debt could be rolled at low rates, spreads were wide and profits juicy.

Now that short term funding markets are frozen, even for credit-worthy borrowers, that business model is broken. Unable to tap new, cheap debt, property owners are turning to expensive bank lines of credit - or nothing at all. At best, this is squeezing margins; at worst, it's risking the viability of entire firms.

The ongoing economic slowdown, now far worse than most expected, won't help much either. Consumers are cutting back, retailers are closing stores and landlords will find rent harder and harder to collect.

Sayonara, strip mall mania.