Commercial Mortgage Backed Security Delinquencies Hit Record High
On Mish’s blog I cam across the latest Realpoint Delinquency Report:
In January 2010, the delinquent unpaid balance for CMBS increased by another $4.3 billion, up to $45.94 billion from $41.64 billion a month prior. The overall delinquent unpaid balance is up 326% from one-year ago (when only $10.79 billion of delinquent unpaid balance was reported for January 2009), and is now over 20 times the low point of $2.21 billion in March 2007. The distressed 90+-day, Foreclosure and REO categories grew in aggregate for the 25th straight month – up by $7.42 billion (28%) from the previous month and over $27.95 billion (508%) in the past year (up from only $5.51 billion in January 2009). This included a substantial jump in 90+-day delinquency in January 2010.
Other concerns / dynamics within the CMBS deals we are monitoring which may affect the overall
delinquency rate due to current credit market conditions in 2010 include:
- Balloon default risk is growing rapidly from highly seasoned CMBS transactions as loans are unable to payoff as scheduled. In many cases, collateral properties that have otherwise generated adequate / stable cash flow results are not able to refinance their balloon payment at maturity, due mostly to a lack of refinance proceeds availability. This scenario has added to loans with distressed collateral performance in today’s credit climate.
- Some five-year and seven-year balloon maturity risk is also on the horizon for more recent vintage pools from 2003 through 2005 where little no amortization has taken place due to interest-only payment requirements. Within this area of concern, large floating rate loan refinance and balloon default risk continues to grow, as many of such large loans are secured by un-stabilized or transitional properties that are soon to reach their final maturity extensions (if they have not done so already), or fail to meet debt service or cash flow covenants necessary to exercise in-place extension options.
- Aggressive pro-forma underwriting was the norm on loans originated for 2005 through 2008 vintage transactions, many with debt service / interest reserves required at-issuance. The balance of such reserves is declining more rapidly than originally anticipated, and many are close to default or transfer to special servicing (if not already there). Exacerbating such concern is the large unpaid balance related to loans underwritten with DSCRs between 1.10 and 1.25 as any decline in performance in today’s market could cause an inability to meet debt service requirements. This is especially evident with the partial-term interest-only loans that will begin to amortize in the near future, or those that have recently converted.
- Declined commercial real estate values and diminished equity in collateral properties may prompt more struggling borrowers with marginal collateral performance to walk away from properties.
- A cautious outlook for the hotel sector remains as many sizeable hotel loans from 2005-2008 vintage pools have reported poor or declined results in 2009 (especially on the luxury side) or were transferred to special servicing for imminent default and / or debt relief. Many properties have had to significantly lower rates to maintain an acceptable level of occupancy across the country and in some cases have experienced severely distressed net cash flow performance as a result. Our expectations are that even more of these loans may be asking for debt relief in the near future and may ultimately default if a resolution is not reached.
- Continued weakening in retail performance may lead to increased loan defaults as we have not yet experienced the full affect of retailer consolidation, closings and possible bankruptcy (i.e. many loans secured by collateral with troubled retailers as an active anchor).
- Layoffs, bankruptcies and downsizing have impacted office vacancies across most MSAs, including historically strong markets like New York City, and this trend is expected to continue.
- External factors mitigating risk include indications that credit liquidity is showing signs of improvement via foreign investors, and public REIT’s are showing the ability to restructure balance sheet debt. Political and governmental focus on job creation in 2010 along with increased support of mid-tier community banks to ease the credit crunch and stimulate lending may affect the overall commercial real estate markets as a whole.
- On the other hand, as three new issue deals closed in late 2009 and more new issuance is expected to come to market in 2010, some of the delinquency growth we have experienced in the trailing 12-months may yet be offset somewhat by any new issuance’s speed to market in 2010.
- In addition, liquidations of severely distressed defaulted loans picked up speed in the latter half of
2009, while modifications and forbearance at the loan level continue to be discussed between
borrowers and special servicers that may also result in a delinquency “leveling-off” period.
Special servicing needs have had a huge increase over the past year. We are about one year into Commercial Property Crunchtime and it seems to be gaining steam.
The impact of CMBS TALF which runs out by the end of this month has of course been negligible. All in all, about $9.8 billion have been settled since its inception, according to the NY Fed’s TALF announcements.
Commercial Real Estate Assessment By the COP
The inevitable commercial real estate crisis still looms, this time the COP chimes in:
The Congressional Oversight Panel today released its February oversight report, “Commercial Real Estate Losses and the Risk to Financial Stability.” The Panel is deeply concerned that a wave of commercial real estate loan losses over the next four years could jeopardize the stability of many banks, particularly community banks, and prolong an already painful recession.
Commercial real estate (CRE) loans made over the last decade – including retail properties, office space, industrial facilities, hotels and apartments – totaling $1.4 trillion will require refinancing in 2011 through 2014. Nearly half are at present “underwater,” meaning the borrower owes more on the loan than the underlying property is worth. While these problems have no single cause, the loans most likely to fail are those made at the height of the real estate bubble. The Panel notes, however, “Even borrowers who own profitable properties may be unable to refinance their loans as they face tightened underwriting standards, increased demands for additional investment by borrowers, and restricted credit.”
Community banks, unlike the largest Wall Street banks, face the greatest risk of insolvency due to mounting commercial real estate loan losses. According to federal guidelines, 2,988 banks nationwide are classified as having a “CRE Concentration.” None of these banks are among the 19 largest bank holding companies. Forecasts project that banks will suffer their worst losses well after the timeframe examined by the stress tests – an exercise conducted only on the nation’s 19 largest bank holding companies – and well after Treasury’s authority expires under the Troubled Asset Relief Program (TARP).
The Panel found that “a significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American.” When commercial properties fail, it creates a downward spiral of economic contraction: job losses; deteriorating store fronts, office buildings and apartments; and the failure of the banks serving those communities. Because community banks play a critical role in financing the small businesses that could help the American economy create new jobs, their widespread failure could disrupt local communities, undermine the economic recovery and extend an already painful recession.
The full report is available at cop.senate.gov.
Since we all have been talking about this inevitable and impending CRE bust, it seems kind of strange that the COP would issue such a report without specific intentions in mind. One can assume that this report along with others will be utilized in order to justify additional programs to provide corporate welfare to failing CRE projects in the form of additional bailout programs.
Moody’s Commercial Property Index Shows 7.6% Decline in May
The MIT Center for Real Estate reports a 7.6% Decline in Commercial Property Prices:
Commercial Real Estate – Bernanke Concerned
After everyone else has been talking about it for years, now Bernanke Says Commercial Property May Pose Risk for Economy:
Federal Reserve Chairman Ben S. Bernanke said a potential wave of defaults in commercial real estate may present a “difficult” challenge for the economy, without committing to additional steps to aid the market.
Bernanke, testifying before the Senate Banking Committee today, urged lenders to modify “problem” mortgages to avert defaults. Christopher Dodd, the Connecticut Democrat who chairs the panel, told Bernanke that “some have suggested” the commercial market “may even dwarf the residential mortgage problems” in the U.S.
The state of commercial real estate was one of the most- asked-about subjects in questioning by lawmakers so far in Bernanke’s two days of testimony on the economy. Bernanke said today in the Senate and yesterday at the House Financial Services Committee that it’s too early to tell how effective the Fed’s main initiative in the area will be.
The Term Asset-Backed Securities Loan Facility, a Fed emergency program that lends to investors to purchase securities backed by consumer and business loans, began accepting commercial mortgage-backed securities as collateral last month.
Fed policy makers will extend the TALF, currently scheduled to expire Dec. 31, should they judge financial markets are still “some distance from normal operation,” Bernanke said today.
TALF Extension
“We will certainly be monitoring the situation, and if markets continue to need support, we will be extending the final date of that program,” Bernanke said.
It “may be appropriate” for the government and Congress to consider “fiscal” steps to support the industry, Bernanke said today. Ideas for fresh support for the market could include government guarantees for commercial mortgages, Bernanke also said today, while noting no proposal on the subject has emerged.
U.S. commercial property prices fell 7.6 percent in May from a month earlier, bringing the total decline to 35 percent since the market’s peak, Moody’s Investors Service said in a report this week. Commercial properties in the U.S. valued at more than $108 billion are now in default, foreclosure or bankruptcy, almost double than at the start of the year, Real Capital Analytics Inc. said earlier this month.
Yesterday, more than a half-dozen members of the House panel mentioned or asked Bernanke about the topic, with Chairman Barney Frank saying there’s a “great deal of fear” that a wave of commercial defaults will produce economic problems similar to those caused by residential mortgages.
“As the recession’s gotten worse in the last six months or so, we’re seeing increased vacancy, declining rents, falling prices — and so, more pressure on commercial real estate,” Bernanke said yesterday. “We are somewhat concerned about that sector and are paying very close attention to it. We’re taking the steps that we can through the banking system and through the securitization markets to try to address it.”
One of the main issues for the industry is that the market for debt backed by commercial mortgages “has completely shut down,” the Fed chief said yesterday.
Considering that Bernanke said in 2007 that there was no housing bubble and that the subprime problems was contained, and said in 2008 that housing will stabilize by the end of 2008, the statements above can only mean one thing: “A disaster in commercial property is impending.”
Commercial property crunchtime is here. And the public is waking up to it.
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.
Commercial Mortgage Backed Securities Downgraded by S&P
Commercial property crunchtime continues to unravel as Downgrades Hit Commercial Mtge-Backed Securities Market:
Bonds backed by commercial mortgages were hit Tuesday after Standard & Poor’s downgraded several CMBS issues amid continued signs of strains in the market for loans to build office malls and shopping centers.
The CMBX Series 5, the most recent derivatives index based on bonds backed by commercial mortgages, fell three points to 72 cents on the dollar on the downgrades, according to Derrick Wulf, a senior portfolio manager at Dwight Asset Management in Burlington, Vt.
S&P cut several of these securities because of a recent change in its rating methodology.
“They have put a lot of bonds on watch for downgrade after updating their methodology, and this is making the market nervous,” Wulf said.
The commercial real estate market is grappling with a worsening outlook. Delinquencies have risen to about 3%, with hotels seeing the greatest month-to- month increase at 3.26%, up from 2.02%, according to a note from Moody’s Investors Service. The aggregate delinquency rate is likely to go up further, to between 5% and 6% by the end of the year, according to Moody’s estimates.
Banks holding commercial mortgages on their balance sheets are expected to feel the pinch as borrowers default on their loans. On Tuesday, Goldman Sachs ( GS) reported stellar second-quarter results but took a $700 million hit on its holdings of commercial real estate mortgage loans. At the end of the quarter, Goldman had $6.4 billion of commercial real estate loans that were “marked really in the low 50s,” meaning reduced by almost half their original valuation, said David Viniar, Goldman’s CFO, Tuesday on the bank’s conference call.
More downgrades are expected, which means more volatility ahead for the CMBS market, as S&P is expected to “roll out the results of their new methodology over the next three to six months,” said Darrell Wheeler, head of securitization research at Citigroup, in a note to clients.
The downgrades mean these bonds are no longer eligible for cheap financing under the Federal Reserve’s Term Asset-Backed Securities Loan Facility, or TALF.
“We think that regardless of S&P’s lack of justification for their methodology changes, if they intend to downgrade bonds, then they should get on with it as it will provide investors with some clarity on which bonds they can buy and finance with TALF,” Wheeler noted.
At this point, the market is “getting bifurcated,” Wulf said, adding that TALF-eligible bonds are doing better than the ones that can no longer be bought using the Fed’s cheap loans.
The central bank will offer another installment of these loans on Thursday.
On Tuesday, the GG-10 A4, a benchmark commercial mortgage backed security, was trading about 100 basis points wider than its close of 675 basis points on Monday after it was downgraded multiple notches from the pristine triple-A to just a notch above junk status at triple-B minus, Wulf said.
Two other rating agencies, Moody’s and Fitch Ratings, haven’t cut their ratings on the bond so far.
It is indeed curious that these downgrades coincide with the beginning of CMBS TALF. As I pointed out 5 days ago:
CMBS TALF will be a miserable failure, just as all other lending facilities launched by the Fed. It is possible that this failure will actually expose the dire situation of commercial lenders and accalerate the downward spiral. Thus, look out for the aftermath of first CMBS TALF auction on July 16th. Rather than it being a cure, it is likely that it will usher in a significant acceleration of commercial property loan defaults.
These downgrades may be just one corollary of what I am expecting.
Commercial Real Estate – Alarm Bells Are Sounding
Late, as usually, US Lawmakers Sound Alarm About Commercial Real Estate Market:
WASHINGTON -(Dow Jones)- U.S. lawmakers rang alarm bells about the troubled commercial real estate industry, which has been walloped by the credit crunch and an implosion of property values.
“The commercial real estate time bomb is ticking,” Joint Economic Committee Chairman Rep. Carolyn Maloney, D-N.Y., said in opening remarks to a hearing before her panel Thursday.
U.S. Sen. Sam Brownback, R-Kansas, said he was distressed about the situation the industry is facing.
Banks have yanked back on lending to developers of shopping malls, apartment complexes, hotels and office parks. Meanwhile, the securitization market – a key source of funding for the commercial real estate industry – has been in a deep freeze since last year.
The situation is fueling concerns that property developers won’t be able to refinance roughly $400 billion in commercial real estate debt coming due this year. Property values have plunged about 24% since their peak in 2007, further hampering developers’ ability to obtain refinancings or loan extensions.
General Growth Properties, one of the largest U.S. shopping mall owners, filed for bankruptcy protection along with 158 of its properties in April, citing lack of financing.
A wave of defaults of commercial real estate loans would deal a blow to the already weakened banking industry. The U.S. commercial real estate market is roughly $6.7 trillion in size and is underpinned by about $3.5 trillion of debt.
The Federal Reserve has taken steps to get lending flowing to the industry. On June 16, it announced it would accept as collateral new issuance of commercial mortgage-backed securities as part of its emergency program to thaw the securitization market. As early as next week, the Fed is expected to extend that to existing, or “legacy”, CMBS already held by investors.
The commercial real estate industry believes these steps will help unleash lending to property owners and developers by spurring more investor appetite for CMBS. To the extent that CMBS investors are able to buy and sell the securities again, spreads will tighten, the Fed argues. That will allow financial institutions that make loans backing the CMBS to free up their balance sheets and make new loans to the industry or refinance existing debt.
Ah sure. The Fed will once again jump in heroically and this time help us by unleashing the dragon of commercial property loans. Let’s have a look at the terms of CMBS Talf:
Subscription Date: July 16, 2009 Closing Date: July 24, 2009 3-Year Maturity Date: July 24, 2012 5-Year Maturity Date: July 24, 2014 Facility Open: July 16, 2009 1:00 p.m. ET Facility Close: July 16, 2009 3:00 p.m. ET Administrative Fee: 20.00 basis points Eligible Collateral: CMBS1 Loan Term: 3 or 5 years
Rates will be set at 12:00 p.m. ET on July 16, 2009 Haircuts for New Issue CMBS and Base Dollar Haircuts for Legacy CMBS:
CMBS Average Life (years)
Sector
0-5
Commercial Mortgage
15%
Rates:
Sector
Fixed 3 year loan
(Average Life, in years)Fixed 5 year loan
<1
1-<2
>=2
Commercial Mortgage
N/A
N/A
3-year LIBOR swap rate
+ 100 bps5-year LIBOR swap rate
+ 100 bps1As defined in the terms & conditions
Loans will be made over 3-5 years, with CMBS as collateral. The objective being that the lenders, now afloat in new cash, once again start making loans to commercial real estate buyers and/or developers.
This misses the fundamental point as to why commercial property owners and developers are in trouble. It is the fact that the consumption credit expansion has brought about an abundance of retail space in malls, shopping centers and elsewhere. On top of that, a lot of businesses from the lending business were utilizing a significant portion of prime office space.
Now those businesses that were utilizing these spaces are going out of business. The recession is trying to send a signal that the resources are needed elsewhere. They are unable to make their rent payments. The owners of the properties start defaulting on the loans made during the credit expansion. The lenders notice that way too much space was built. There is no demand for any more retail space. In fact, there is a significant surplus. Nobody wants any more retail space. People are sick and tired of debt and over consumption.
Now, what are those very lenders going to do when they receive additional loans from the Fed, at around 2.9% to 3.7%, maybe even more for higher maturities. So they would have to earn at least an additional 100 basis points, probably more, in rental yield in order to make this investment worth their while, and that over the next 3-5 years.
Is this going to happen in an environment of falling prices for commercial properties, falling rents, and record vacancies? No, absolutely not. When people have had enough of something, they’ve had enough. If this is still not clear, I would recommend reading Robert Prechter’s example on Jaguar Inflation which I posted in Inflation and Deflation Revisited.
CMBS TALF will be a miserable failure, just as all other lending facilities launched by the Fed. It is possible that this failure will actually expose the dire situation of commercial lenders and accalerate the downward spiral. Thus, look out for the aftermath of first CMBS TALF auction on July 16th. Rather than it being a cure, it is likely that it will usher in a significant acceleration of commercial property loan defaults.
Crunchtime for Mall Owners
Reuters writes U.S. mall vacancy rate soars, rent dives:
NEW YORK, July 8 (Reuters) – The vacancy rate at U.S. strip malls reached a 17-year high in the second quarter, and empty space at regional malls struck a nine-year record as more retailers downsized or went out of business altogether, according to a leading real estate research firm.
The consumer-led U.S. recession has hurt retailers hard and pummeled their landlords, forcing many store owners at neighborhood shopping centers and malls to shutter their businesses. Those still alive have reduced their space needs or negotiated for lower rental rates.
Falling incomes of landlords have made it increasingly difficult for them to meet loan payments and may fuel an already-rising rate of defaults within the retail real estate sector.
“It doesn’t take much to knock your incomes down if you’ve levered up,” said Victor Calanog, director of research for Reis Inc, which released its quarterly report on Wednesday. “There’s just no support for income-generating properties being able to meet fixed-debt obligations.”
During the second quarter, the vacancy rate at U.S. strip malls reached 10 percent, the highest level since 1992, the report said.
Meanwhile, asking rent fell 1.7 percent from a year ago to $19.28 per square foot. Asking rent fell 0.7 percent from the prior quarter. It was the largest single-quarter decline since Reis began tracking quarterly figures in 1999.
Factoring in months of free rent and other concessions, effective rent declined 3.2 percent year-over-year to $17.01 per square foot. Effective rent fell 1.1 percent from the prior quarter.
About 7.9 million square feet of space was returned to the market during the quarter. The amount was second only to the 8.1 million square feet in the first quarter.
The picture was no prettier for U.S. regional malls, whose vacancy rate rose to 8.4 percent, the highest vacancy level since Reis began tracking regional malls in 2000.
Asking rents for regional malls continued to deteriorate but at a faster rate, falling 1.4 percent in the second
quarter, compared with 1.2 percent in the first. Year-over-year asking rent fell 2.9 percent to $39.42 per square foot.Rising U.S. unemployment and soaring home foreclosures point to a longer recession and greater insecurity among consumers. With a dearth of positive indicators, it does not look like a green shoot of recovery will be able to fend off deteriorating rents and occupancies in the sector.
“Right now it looks like all signs are pointing to rents and vacancies, big components of income, getting shot down,” Calanog said. “Until we see stabilization and recovery take root in both consumer spending and business spending and hiring, we do not foresee a recovery in the retail sector until late 2012 at the earliest.”
That does not bode well for mall owner General Growth Properties Inc (GGWPQ.PK), which filed for bankruptcy
protection in April, after it failed to refinance maturing loans.It also could translate into tougher business conditions for shopping center owners, such as Cedar Shopping Centers Inc (CDR.N), Equity One Inc (EQY.N) and Kimco Realty Corp (KIM.N).
This is commercial property crunchtime in action. Remember, what the article I referenced back then said:
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.
Why there is more pain to come for commercial mortgage lenders:
Mortgage Losses To Come (note the whopping 3.5 trillion for commercial mortgages):
Click on image to enlarge.
To add some personal experience: A friend of mine leases an entire floor at a prime location in the San Francisco financial district. He used to pay $40 /sqft over the past 2 years. His lease is now coming up for renewal. He negotiated it down to $27 /sqft for the new lease. And this was 2 months or so ago. I think there are even better deals to come as the market for prime locations continues to get flooded with vacant space.
Commercial Real Estate Poised to Implode
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.
Markets Slide Alongside Lousy T-Bond Auction
Markets took a slight hit today. The significant event of the week, maybe even of this quarter was a lousy auction for bonds maturing on 05/15/2039.
They traded as low as 4.13% before the auction and went as high as 4.30% to close at 4.26%, or 13 basis points higher.
Some random observations/expectations:
- Tech stocks, which lead the recent rally, lead the decline today.
- Short interest on some stocks is remarkably low
- In particular I am monitoring commercial property businesses, such as Simon Properties Group, and Vornado, both of them have a short interest of close to 0% in spite of the impending commercial property crunchtime.
- Jobs data on Friday will probably report something between 400,000 to 600,000 nonfarm jobs lost again, based on today’s ADP jobs report.
Nonfarm private employment decreased 491,000 from March to April 2009 on a seasonally
adjusted basis, according to the ADP National Employment Report®. The estimated change of
employment from February to March was revised by 34,000, from a decline of 742,000 to a
decline of 708,000
Whether these are signs that the recent bear market rally is coming to an end…only time will tell.
Commercial Property Crunchtime
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.
Retail and Food Service Sales Down:
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.
Virgin Closes 2 More Megastores:
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…
-
Recommended Books
Important Posts
-
US Taxes, Spending & Debts – Historical Charts
-
The Ethics of Voluntaryism – An 8 Step “Cross Examination”
-
How to Debate Without Looking Things Up
-
Quantitative Easing – “Easing” the Theft of Large “Quantities” Over Time
-
Human Action, Ethics, Praxeology, Economics, and History
-
Praxeology and History
-
The Global Warming Information Extravaganza
-
US Poverty Rate – How the Great Society Programs Reversed its Decline
-
Existence, Logic, Evidence, Truth, Knowledge & Bigotry
-
The Root Causes of the Financial Crisis & The Great Recession
-
Why Are You Unemployed?
-
Human Rights in Relation to Ethics, Morality & Aesthetics
-
What’s the Problem With Government Budget Deficits?
-
Universally Preferable Behaviour – A Rational Proof of Secular Ethics
-
Is Government Needed to Fight Poverty??
-
Market Prices – Purpose vs. Arbitrariness
-
War Is A Racket – Made By Government
-
Anarchism / Voluntaryism FAQ
-
Human Rights & Anarchism
-
Government Equals Aggression – Nothing More, Nothing Less
-
Fixing US Health Care Once And For All – 5 Crucial Steps
-
How Minimum Wage Laws Create Unemployment
-
100% Reserve vs. Fractional Reserve Banking
-
Anti-Libertarian Nonsense Debunked
-
Anarchism – The Ultimate Fruition of Liberty, Peace & Happiness
-
The Roots of Left vs. Right Ideologies
-
Inflation & Deflation Revisited
-
The Business Cycle Revisited
-
Saving the X Industry
-
We Need More Regulation
-
The End of Consumerism
-
Savings and Investment
-
Freedom, Liberty, Peace, Happiness and Prosperity
-
The Business Cycle
-
The Trouble with Bureaucracy
-
Stock Evaluation
-
The Great Depression – Now and Then
-
The Economics of Corporate Bailouts
-
Antitrust and Monopolies
-
History of Money
-
The Objectives of Economic Policy
-
Credit Expansion Policy
-
