Federal Reserve says commercial real estate may pose risk for U.S. economy
Editor’s Note: Looks like the prediction is correct and U.S. lawmakers are inquiring and most likely drafting up programs to assist with the decline commercial property market. When residential real estate prices where declining rapidly in 2007, I knew the next shoe to drop would be the commercial market.
With all the securities that were created and sold during that time, money was cheap and we witness major construction and renovations in the U.S. happened at a pace that was not sustainable for the long term. Not sure about you, but in Seattle, we are seeing many “for lease” signs on commercial spaces. Most of these projects were underwritten during the bubble so their income projections were very generous to say the least. We will be following this story closely to get the details out as soon as they are made available or we find them first.
News (Bloomberg):
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.
Bad signs for U.S. commercial real estate
Editor’s Note: This reinforces what has been said on CFB for months now. Commercial real estate is the next boot to drop in the general real estate decline. This is going to pile up more losses for banks that are holding this type of paper on their books. We are predicting here that a bailout will be announced for the commercial property market to help refinance all these “under-water” commercial mortgages. Or, if we do not see this happen then we will see a flood of defaults or borrowers walking away and that will lead to a growing “Commercial REO” market that will drag down prices on commercial properties in the same area. It can become a vicious cycle.
Idaho Business Review: There’s trouble brewing in commercial real estate. Say you bought a building for $1 million in 2005. At the time, you could get a loan for 75 percent of the value, so you paid $250,000 down and you owe $750,000.
Now it’s 2010, and your loan is due. It’s time to refinance.
You face two problems: First, the value of your building has declined due in part to fewer tenants, lower rents and fewer buyers. Say its declined 20 percent, so it’s now worth $800,000.
U.S. commercial mortgages hit by appraisal value cuts
Editor’s Note: $8 billion is a drop in the bucket compared to the couple trillion in commercial loans that have been written in the last few years. The story for 2009 & 2010 will be the continue decline in the commercial real estate market. In my home market of Seattle, I have seen many commercial properties become vacant in the past year and I don’t see that trend stopping anytime soon. Most businesses are looking to reduce their operating costs and reducing the amount of space they lease is a good way to cut costs.
News (Reuters):
Falling U.S. commercial property values have resulted in appraisal reductions on more than $8 billion in office, retail and apartment building loans in May, more than double that of December, according to Trepp, a firm that tracks commercial mortgage-backed securities.
The average appraisal reduction is 36 percent of the loan balance, it said.
Reductions in appraised values on buildings have resulted in shortfalls of interest payments to investors, including some on bonds protected from the first loss, it said.
Source: Reuters
Fed offers TALF lifeline to commercial real estate industry
Editor’s Note: As you know, I called this coming and here it is. It was obvious that once we handled the residential real estate depression, the commercial real estate sector would be next in line. First the CMBS securities are going to be used as collateral to get bailout loans. Next step I see, is a bailout program that will allow commercial mortgages to be refinanced to a lower rate.
News (Reuters):
The U.S. Federal Reserve on Friday threw the battered commercial property sector a lifeline by granting it access to an emergency program set up last year to unlock credit markets frozen by a global financial crisis.
The Fed said its $200 billion Term Asset-Backed Securities Loan Facility, which it has already said may grow to $1 trillion in size, will be opened from June to commercial mortgage-backed securities that were issued in 2009.
Commercial mortgage delinquencies jump due to softening economy
Editor’s Note: This trend will continue as long as we are in a recession in the U.S. and the demand for commercial and retail space is down. Businesses have been reducing costs and reducing the amount of commercial space they lease is part of that program.
News (Reuters):
A rally in commercial mortgage-backed securities eased on Friday as delinquencies on loans in the bonds accelerated, according to investors and Trepp, LLC.
Pimco’s McCulley Says Commercial Mortgages ‘Broken’
Editor’s Notes: Commercial Real Estate will need to be addressed sooner or later. These markets are inter-connected to the point where when they grow, they grow together and when they collapse it pulls down the other sectors. There has been lobbying on behalf of the commercial mortgage industry to have some assitstance along the lines of possible helping commercial property owners refinance their properties at lower rates. Here was a comment I found interesting being that it asks for leverage to come back to the markets and I am not sure that is what the doctor ordered - “Essentially it is a joint venture to create a government- sponsored shadow bank to return leverage to the marketplace,” McCulley said. “It is exactly what the doctor ordered.”
News (Bloomberg):
Pacific Investment Management Co.’s Paul McCulley said problems still exist in the commercial mortgage market even as economic data including today’s housing price gains indicate the economy is in a bottoming process.
“The commercial securitization market is broken,” said McCulley, a partner and fund manager at Pimco, in a Bloomberg Television interview from Newport Beach, California. “The focus in the last couple years has been on the residential side, but we are having a bust of sorts on the commercial side.”