“Double Bubble” means the commercial real estate is next to pop
Editor’s Note: The calls are getting louder with MSNBC taking about the impending collapse of the U.S. commercial real estate market. In the article they quoted that in 2006, 54% of the regional and local banks portfolios were made up of commercial loans compared to only 40% a decade before.
With values declining, many commercial loans coming due over the next 5 years and a much smaller appetite on investors behalf for this type of paper. The industry is going to have some serious troubles with these loans that were written at high valuations seen during the peak of the real estate bubble.
We will see if Congress is going to sit back and let this market implode on itself or will it come to the rescue again and provide financing to save these note-holders? My bet is “yes”
That big whoosh you’re hearing is the air rushing out of a commercial real estate bubble.
More than two years into the worst housing crisis in decades, commercial real estate is shaping up as the second half of what some are calling a “double bubble.” Owners of shopping malls, hotels, office space and apartment buildings — and the bankers who financed them — face a major crunch over the next two years as the mortgages on those properties start coming due.
Much like homeowners who now owe more on their mortgage than their house is worth, many commercial property owners have seen the value of their properties plummet, increasing the risk of default on hundreds of billions in commercial real estate loans.
Federal Reserve Focusing on Commercial Real-Estate Recession as FOMC Meets
Editor’s Note: Ben Bernanke’s assessment is spot, we can not call it a recovery if we have commercial real estate tanking as well. Not to mention the Prime and Alt-A home mortgages that having rising default levels. According to the Bloomberg piece, commercial property values have fallen 35% since Oct. 2007. In the article it states $165 billion in commercial loans will be coming up for refinancing. This is the next shoe to drop.
News (Bloomberg):
The collapse in commercial real estate is preventing Federal Reserve Chairman Ben S. Bernanke from declaring the economy and financial markets are healed.
Commercial and Multifamily Loans Increase in 2nd Quarter, Still Lower than 2008
Business Journal, Milwaukee - The number of commercial and multifamily mortgage loans taken out during the second quarter was 50 percent higher than the first quarter, but 54 percent lower than the same period last year, according to the Mortgage Bankers Association.
The rise signals that commercial and multifamily mortgage originations bottomed in the first quarter, according to Jamie Woodwell, MBA’s VP of commercial real estate research.
Banks reduce commercial loan level as federal guidelines tighten
Denver Post, Colorado – Banks are balking at extending loans to real estate developers because of federal regulatory pressure on financial institutions to contain the volume of their commercial lending. That’s forcing developers in search of refinancing to default on existing loans and, in turn, give the property to the banks.
The problem stems from federal guidelines issued in 2006 from three bodies — the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Federal Reserve board of governors — that say banks should keep commercial real estate lending to less than 300 percent of their total capital.
$165 Billion in U.S. Commercial Loans Due in 2009
Editor’s Note: First American is a large title company that has various data services they provide for the real estate industry. With First American reporting that commercial rental rates are dropping, that means the Net Operating Income (NOI) on many of these maturing loans are going to be reduced. That means it could be problematic when you go to value the property to refinance and the it is valued less than the mortgage that is attached to it. Either the borrower will have to make up the difference or they will lose equity built up in the property when it gets finance at a lower value.
News (Bloomberg):
Almost $165 billion in U.S. commercial real estate loans will mature this year and need to be sold or refinanced as rents and occupancies fall, according to First American CoreLogic.
No recovery for U.S. commercial real estate markets until 2017
Editor’s Note: Quite a gloomy outlook on the U.S. Commercial Real Estate Market. Commercial property values dropping by potentially 50% or more. With no recovery until 2017, that would be a protracted period of increased defaults on commercial loans. I am waiting for the official announcement of a bailout program targeted at refinancing commercial loan notes. Along with the Alt-A home loans resetting this year and 2010, we are going to see more commercial defaults as many of these notes have their interest rates rise at the Libor and different key bond issues these loans can be tied too. When the economy finally shows real signs of recovery, I don’t think the lending capacity will be back at the level it was during the boom years. That means without some sort of additional lending capacity, we will see many borrowers facing foreclosure on their commercial property.
News (Reuters):
The U.S. urban commercial real estate markets probably will not recover until 2017, the head analyst of commercial mortgages for Deutsche Bank Securities said on Monday.
Red Roof Inns defaults in $361 million commercial loans
Editor’s Note: Hospitality is being hard hit right now in the U.S. economic downturn. We will likely see more defaults and more downward pressure on commercial real estate focusing on retail and hospitality. Commercial real decline will the story of 2009 and 2010.
News (Reuters):
Red Roof Inns Inc, the discount hotel chain with nearly 350 properties, became the latest in the downtrodden hospitality industry to default on debt made during the credit-driven real estate boom, the company confirmed on Tuesday.