Tuesday, July 27, 2010

Commercial Real Estate Armageddon On The Way?

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."

My Take:

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.



Dr Stuart Jeanne Bramhall said...

Having had personal dealings with the Resolution Trust Corporation, I have a somewhat different recollection of them. It wasn't "people" buying discounted property at cents on the dollar - it was Goldman Sachs buying discounted property at cents on the dollar. At a time when the man running the RTC was a former Goldman Sachs executive (fortunately this behavior is illegal now). It's also important to remember that part of the RTC's job was to criminally prosecute people like Jeb and Neil Bush, who brought down at least one S&L each (at least that we know of) through fraudulant lending activity - and George Bush senior who was diverting fraudulant loans from 27 other S&L's to covert mercenaries in Nicaragua, Afghanistan, Chad and Angola (Pete Brewton covers all this in his 1992 Houston Post expose). Meanwhile the RTC was screwing over honest busines "people" like me by refusing to honor our loan contracts when the banks who held our notes went bankrupt. I reckon the RTC owes me $300,000 plus 17 years interest as a result of our encounter. I write about all this in my recent memoir THE MOST REVOUTIONARY ACT: MEMOIR OF AN AMERICAN REFUGEE (currently in exile in New Zealand).

Anonymous said...

And in other news, Case Shiller reported that home prices rose...again. In DC the value is 182.1 up 1.45% MOM and 7.45% YOY.

But dont worry, Jeff promised us that by the end of May 2012, 22 months from now, DC housing prices will have CRASHED and be down at 125.0 (or worse). Sadly for Jeff, prices have risen a few ticks since he called for the crash. No matter, instead of calling for a 30% crash, it will now be a 31.2% crash right Jeff?

Hopefully this result wont discourage you enough to give up and admit you were wrong just yet. You are far too stubborn for that. I am optimistic that prices will trend down soon, once again, driving you into a frenzy of emotion driven angst about how house prices in DC are far too high and due for an "imminent and severe crash of biblical proportions."

So whats it gonna be Jeff? Do you eat your shit sandwich now and say "I was wrong"? Or do you continue to hold out, continuing to take a dump on the DC market, only to make that shit sandwich that much bigger when you eventually have to take a bite in 2012?

Your move my friend.

getyourselfconnected said...

you must live in DC or something.

Jeff said...


He just cracks me up.

I am amazed that he continues to believe he is right when you see what housing has done since the tac credit expired.

This yahoo doesn't get the fact that the tax credit spilled over into the Case Shiller numbers.

Unreal. People are clueless.

Anonymous said...

"Jeff said...

This yahoo doesn't get the fact that the tax credit spilled over into the Case Shiller numbers."

OH REALLY??? Is that it Jeff? So why did I say last month:

"This was a huge move up. Certainly due in part from the tax credit..."

Still think I dont "get" that? The reality is, I am relying on it. I am expecting 1 maybe 2 more months of up pricing before a move down as the last of the tax credit is exhausted.

When this happens, I expect you to get all ginned up, like jo jo the dog faced boy...By October, November, I expect to see you absolutely CROWING as prices start moving down. I hope this will be the most prolific time for you to drop turd after turd of doom as you gain confidence that by 2012, you will be vindicated. I cannot WAIT to gather these quotes to ridicule you in the months to come.

No. Fact of the matter is, in my mind anything above 170 is gravy, simply gravy at this stage in the game. Never in my wildest dreams did I expect prices would keep rocketing up past 175 to 178, 180, 182 by now!

Fact of the matter is, you are a dead man walking, you just dont know it yet. There is NO CHANCE you get all the way down to 125 in the next 22 months.

Still, I dont want to beat you down too hard just yet. I want you to think you still have a chance so you will keep delivering choice quotes about how bad its gonna be when time shows you were right all along. So keep giving me quotes of imminent doom Jeff - I love it!!!