Good Evening Folks!
Its pretty quiet on the news front this weekend.
The one development was further noise around a potential government bailout of commercial real estate. This was one their headline economic stories today. The heats on the Fed's to get this one done IMO. Here is the article from the New York Times:
"Commercial real estate groups have been meeting with members of Congress, the Federal Reserve, the Treasury, the Federal Deposit Insurance Corporation as well as Mr. Obama’s transition team, to press their case. And they say they have a compelling one. Commercial real estate is a significant industry, accounting for $549 billion in construction-related spending and nearly five million full-time jobs in 2007, according to the National Association of Industrial and Office Properties. It also contributes to state and local coffers.
Although commercial real estate remains in better shaper than some other industries — there is a good balance between supply and demand, vacancy rates are modest and loan default rates have so far hovered at a rock-bottom 1 percent, according to trade groups — industry leaders warn that the sector faces significant problems. In particular, tighter credit policies are making it harder for real estate companies to refinance. An estimated $400 billion in loans are expected to come due in 2009 alone, and more than $1 trillion over the next three years, according to industry estimates based on Federal Reserve data.
“We have profound risk on our hands at the moment,” said Bruce Mosler, the president and chief executive of Cushman & Wakefield, a commercial brokerage firm.
Jeffrey DeBoer, the president and chief executive of the Real Estate Roundtable, an industry group based in Washington, agreed. “Commercial real estate debt will be the next major problem that policy makers need to address,” he said
The commercial real estate industry relies on a steady stream of relatively short-term financing; loans are refinanced every several years or so. With the two main sources of commercial funding — bank lending and commercial mortgage-backed securities — effectively shut down, hundreds of billions of dollars worth of loans are in jeopardy of defaulting.
The bulk of the loans coming due, industry executives say, were originated two or more years ago to help finance a rash of deals in office towers, hotels and industrial buildings, many of which are generating healthy cash flow today. “We’re talking about performing loans — that’s the rub,” said Thomas J. Bisacquino, the president of the National Association of Industrial and Office Properties.
Of course, there were also speculative, highly leveraged deals at the height of the economic bubble, when rents and property values looked as if they would rise indefinitely. As vacancy rates climb and values drop, many of these loans will need to be restructured.
Existing properties are only half the problem. New development has also ground almost to a halt because of a lack of financing.
Real estate executives say Treasury officials the transition team to a new Obama administration have been listening. “There’s an openness to serious consideration of all of these things,” said Steven A. Wechsler, the president and chief executive of the National Association of Real Estate Investment Trusts.
The Obama team will have a lot on its plate, but executives were hopeful that measures will be taken early next year."
Now that the automotive bailout has been completed its time for the TARP to move on to its next bailout. It appears commercial real estate is next.
This is getting disgusting isn't it?
It looks like the commercial industry is going to follow the automotive playbook: Scare the hell out of Congress by screaming Fire! Fire! Fire! It appears the commercial industry is going to try and one up the automotive industry by warning that 5 million jobs would be lost versus the paltry 3 million in automotive if they don't get their piece of TARP PIE.
I think this bailout is going to happen folks. It will be done because the banks can't afford another $1 trillion hit. There are $400 billion dollars of loans that must be rolled over in 2009 alone
Another reason this will be done is because commercial now has zero ways to get financing right now. This is a different lending game folks. You don't get 30 year fixed loans in the commercial market. You refinance and roll over your debt every 3,4, or 5 years. If the banks no longer want to lend to them, and the CDO securitization market is no longer available, these REIT's have zero options for funding. There will be financial chaos if something isn't done here.
The problem here is many of the loans done in 2004-2006 were done using terrible lending standards. This is another mess ladies and gentleman.
The Fed must find a way to allow these loans to get refinanced or there will be no retail in this country. We all know that's not going to happen. Expect the Treasury to extend some type of lending program to the commercial that allows them to roll over their good debt.
It will be interesting to see wha they do with the bad loans. Do the taxpayers once again take the hit so that these REIT'S that made poor decisions don't go under? My guess is of course! Why would their bailout mentality stop now? God forbid anyone's allowed to fail anymore in this country.
The possible bailout here makes SRS unplayable right now in my book. Its too risky. If the REIT's get a sweet deal, SRS is going to get pummeled. If the government decides to send a message of "no more bailouts" or severely damages them via warrants, SRS could soar.
The only trade I see here is to buy SRS on any dip if a bailout is announced.
Enter this sucker at your own risk.