Minyanville has recently been the staging ground for an excellent debate on the outlook for commercial real estate. One side says the amount of refinancing of debt by the REITs simply won't be absorbed by the market. The other side says the Fed and Treasury are in control and all their programs will eventually drive corporate spreads down, thus saving commercial real estate.

In my opinion, the Fed has no interest rate bullets left, and quantitative easing hasn't moved longer term rates lower since the program was announced in March. In fact, they're higher. So far, the Fed has managed to drive the TED spread and LIBOR back to reasonable levels. Higher-quality commercial paper trades much better than it did a few months ago. Mortgages rates are also down. All because the Fed has been buying. The only thing that isn't down to reasonable levels is the corporate bond spread to Treasuries, both investment grade and junk.

It’s only a couple of data points, but here’s what scares me: The John Hancock Building in Boston, an absolute landmark, sold in foreclosure in April at 50% of its appraised price in 2006. It make it worse, the buyer took over a mortgage at a coupon of 5.6% for 97% of the purchase price. There's no 5.6% commercial mortgage money around any more, so the real purchase price was lower, closer to 40% if real financing could have been found.

Next is the clearing price for General Growth Properties’ (GGP) secured debt. General Growth is a major REIT that primarily owns regional shopping centers in 44 states. It filed for bankruptcy in April after it was unable to refinance its debt. Last week there was an auction to settle the credit default swaps. The secured debt settled at $0.43 on the dollar.

So here we have a high quality office building and pretty good regional malls across the country, and the debt is trading in the 40s. On Friday, Minyanville had an interesting guest editorial by Adam Heine (Commercial Real Estate's Rebound Still Years Away) which I encourage everyone to read if you haven’t yet. He’s saying out in the real world, you need to start thinking of debt for equity swaps to get leverage down to 50% loan to value (LTV).

Some of the big REITs have been raising equity in the past few weeks, Vornado (VNO) and Simon Property Group (SPG) come to mind, but they have a long, long way to go to get to 60% LTV, much less 50%. If you have to have actual debt to equity conversions, I don’t think the common shareholders are going to very happy with the conversion price and the subsequent dilution.

Short of a Fed program to buy a couple trillion dollars of corporate bonds and force spreads down, the bond market views the economy this way: Bernanke only has a few divisions left. I can't see a significant tightening in corporate or commercial real estate spreads. There's no "V" recovery coming in this economy.

It's going to be a long slow trip out of this recession, and commercial real estate is in for a very slow recovery. The buildings will still be there, but the equity in REITS, the share price, might not be there.