Commercial Real Estate Poised to Implode

posted by Nima

May 25, 2009 · Posted in Business 

Nothing but grim news on the commercial real estate front. The New York Post writes NO NEW LEASE ON TRILLIONS IN DEBT:

A trillion-dollar storm is gathering over the commercial real estate landscape that’s threatening to add further pain to an already bruised US economy.

At the center of the worries is some $3.5 trillion in debt backed by everything from strip malls to offices and apartments across the nation — the lion’s share of which is badly underwater because this recession followed a five-year commercial property boom fueled by easy money and loose underwriting standards.

Now the owners of the less-than-full malls, apartment complexes and office buildings are succumbing to the worst economic collapse since the Great Depression — because they can’t refinance the debt.

The commercial debt securitization market is dead.

“Because there is no securitization the system cannot process the wave of maturities coming due,” said Scott Latham, commercial property broker at Cushman & Wakefield.

“This is arguably the most important fact we’re going to be dealing with. If there’s no mortgage market that can feed the machine you’re just not going to have deals,” he said. “It’s going to be years before we recover and even when that happens we’re going to discover that we’re in a new paradigm,” Latham added.

About $1.4 trillion in real estate debt is set to mature over the next four years, with some $204 billion coming due this year alone.

Most of that debt won’t be able to be refinanced or restructured because lending standards have tightened and commercial real estate values have cratered since last year, according to Deutsche Bank analyst Richard Parkus.

The debt behind the commercial real estate boom, commercial mortgage-backed securities, or CMBS, entails pooling together commercial mortgages in apartment buildings, shopping malls or trophy offices in different locations, packaging them into bonds and selling them to investors.

CMBS issuance reached its peak with $230 billion transactions completed in 2007. Last year, as the market was dying, a relatively anemic $12 billion in activity was seen, according to industry newsletter Commercial Mortgage Alert.

Most of this does not seem to have a major impact on large national banks, but the total number of small banks affected will be huge, according to the Wall Street Journal Small Banks Face Hits on Commercial Real Estate:

Thursday’s “stress-test” results will bring fresh scrutiny to the nation’s biggest banks. They also are likely to highlight the woes from commercial real-estate loans that are piling up at large and small banks alike.

In the worst-case scenario, federal regulators examining the 19 largest U.S. banks are projecting losses of up to 12% on commercial real-estate loans over two years, according to a document viewed by The Wall Street Journal. The regulators are likely to cite commercial-property debt problems as a major reason why at least some of the large banks need additional capital.

My comment: Does anyone seriously believe that in a worst case scenario the banks will lose no more than 12% on commercial real estate loans? But even then:

With that loss rate, “you’re talking about a depression in the U.S. economy and a major crisis in the banking system,” says Richard Bove, an analyst at brokerage firm Rochdale Securities LLC.

… say hello to commercial property crunchtime.

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