Commercial Property Crunchtime
March 27, 2009 · Posted in Business
The Wall Street Journal writes Commercial Property Faces Crisis (notice the bold part) :
Commercial real-estate loans are going sour at an accelerating pace, threatening to cause tens of billions of dollars in losses to banks already hurt by the housing downturn.
The delinquency rate on about $700 billion in securitized loans backed by office buildings, hotels, stores and other investment property has more than doubled since September to 1.8% this month, according to data provided to The Wall Street Journal by Deutsche Bank AG. While that’s low compared with the home-mortgage delinquency rate, it’s just short of the highest rate during the last downturn early this decade.Some experts say it now looks as if the current commercial real-estate slump will rival or even exceed the one in the early 1990s, when bad commercial-property debt played a big role in dragging the economy into a recession. Then, close to 1,000 U.S. banks and savings institutions failed. Lenders took about $48.5 billion in charges on commercial real-estate debt between 1990 and 1995, representing 7.9% of such debt outstanding.
Since late 2007, a total of 47 banks and savings institutions have failed, of which a dozen or so had unusually high commercial-mortgage exposure. Foresight Analytics in Oakland, Calif., estimates the U.S. banking sector could suffer as much as $250 billion in commercial real-estate losses in this downturn. The research firm projects that more than 700 banks could fail as a result of their exposure to commercial real estate.
These numbers are truly staggering. This goes to show us that the correction is very very far from over. Anyone who talks about a speedy recovery or calls a bottom at this point is blithely ignoring, among other things, the impending collapse of commercial property values, rents, loans, and the effect that it will have on a significant number of banks and businesses.
The fact that the delinquency rate is still relatively low shows us that this is only just the beginning:
Who seriously doubts that this commercial property implosion will be much more severe than the one in the 90s and in 2003?
Some excerpts of my writings on this topic over the past year:
I expect that in 2009 commercial real estate will finally be recognized by the wide public as the disaster it is. Amercia doesn’t need any more Malls. Companies with high exposure to commercial retail properties will suffer. Stocks of Simon Properties Group (SPG) and Federal Realty Trust (FRT) will follow General Growth Properties (GGP) and tumble.
- Commercial real estate and consumer credit will be the next sub-prime crisis and companies from those industries will get in line for massive bailouts
…more bad news for commercial real estate as already mentioned in Holiday Retail Sales Down. The impact of Macy’s closing down just 1 location will be devastating for anyone who rents out the space. Multiply that by 10.
This is consistent with a miserable shopping season, closing chain stores, and contracting consumer credit. In addition it is important to stress again and again the disastrous consequences that this whole trend will continue to have on commercial real estate in the US.
It cannot be pointed out often enough what a devastating disaster still awaits the commercial property industry. It will make the current residential real estate bust look like a soft landing.
I may add to this: This implosion of commercial real estate will not be confined to the United States. It will spread like a global epidemic. In particular China has a lot of excess space. Its current export contraction will only add to the decline in values and rents. It will affect the entire region around it, including the popular property trusts in Singapore and Hong Kong.
Buckle up, get ready for commercial property crunchtime…