Well this was interesting to watch:
A few quotes from the article before I comment:
"In the early 90's when the financial downturn happened you had the RTC (Resolution Trust Corporation), which the FDIC (Federal Deposit Insurance Corporation) set up. The RTC was taking "all these bad banks and then throwing the paper at discounts, and people were buying them at cents on the dollar," the CEO said.
"This used to be the blood on the streets" in the commercial real estate market, Rechler said, adding, "this happened quickly," he said.
But today it's not just about the debt, "they actually have to inject equity," Rechler said.
If you look at the CMBS (commercial mortgage-backed securities) over the next five years, "about 65 percent of the debt" will be maturing. "You can't replace the same amount of debt in today's market with the amount of debt that is maturing—its going to need more equity," he concluded."
Scott Rechler pretty much nails it here.
The numbers here are staggering.
As you can see above in the video, the commercial securitization market has just about disappeared. There were only $17 billion in commercial seceritizations done from 2008-2010 versus a whopping $602 billion fom 2005-2007
Based on Rechler's calculations 65% of the loans are about to mature.
As Rechler explains, most commercial loans come to duration in 5 years. Some need to be rolled over in as little as 1-2 years.
Based on the numbers above, this means about $400 billion in commercial loans needs to be rolled from 2010-2012. This total could be a little higher if some of the 2004 loans are included.
The issue we have here is the properties included in these securitizations are worth way less today then they were when they were securitized in 2005-2007.
This is a huge problem because the banks will not roll over the loans because the commercial property values have collapsed since the paper was written.
As a result, they will demand cash from the developers before they allow them to roll over the debt, and there is no way that the developers have the billions of dollars that are needed in order to make up the difference.
This means that all of these commercial securitizations are likely worth pennies on the dollar just as Rechler describes above when this last happened in the early 1990's.
The Bottom Line
It's time to pay the piper in commercial real estate.
We can still play "extend and pretend" in housing because they are 30 year loans.
Commercial real estate unfortunately doesn't have this luxury because the loans are all much shorter in duration(5 years or less)..
The banks are going to take huge losses on these securitizations because they aren't going to roll over overvalued paper, and they have ran out of suckers to sell this CMBS garbage to unless they want to unload for .10 on the dollar.
The only way out here is a bailout and I don't see this happening in the current political environment.
Like I have said before: Extend and pretend can only last so long before the whole things blows up. Fraudulent accounting is all well and good until loans actually need to be rolled over or paid back.
Sit back and enjoy watching "Commercial Armageddon" over the next few years. Things have just gotten started.
Disclosure: No new positions at the time of publication.