Commercial Real Estate (CRE): The Slow-Mo Cliff-Dive Gathers Speed

by ilene - November 17th, 2010 4:02 pm

Commercial Real Estate (CRE): The Slow-Mo Cliff-Dive Gathers Speed

cre market Courtesy of Charles Hugh Smith, Of Two Minds

Commercial real estate is in a structural cliff-dive, currently in slow-motion but soon to gather momentum.

With all the hub-bub about the foreclosure crisis in residential real estate, commercial real estate (CRE) has fallen off the radar screen of crises. Don’t worry, it’s still careening off the cliff; the fall is just in slow motion.

No need for a fancy report to see the signs of decay in CRE. Signs of the ongoing CRE meltdown are everywhere--empty storefronts, mall shops and vacant office complexes abound.

The causes are all too familiar: lending standards went out the window, banks loaned too much, buyers paid too much, lousy deals were avidly securitized, cash flow projections entered Fantasyland and unhealthy speculation fed widespread fraud.

Since boom-and-bust cycles of overbuilding and retrenchment are endemic to commercial real estate, it’s tempting to view this as just another post-expansion trough. Since prices have already slipped a staggering 40% from the 2006 peak, those calling this the bottom of the current cycle have some history on their side.

But beneath what appears to be a standard-issue retrenchment--a glut of inventory to work through, lenders avoiding risk instead of embracing it, and so on--structural changes in the U.S. economy are changing the CRE landscape for good--and not in a positive direction.

A long-term structural decline in CRE is not just a real estate industry concern. With some $1.7 trillion in CRE loans needing to be refinanced in the next few years, a continuing decline in CRE values could push the still-fragile banking system into a new crisis and the economy back into recession as early as next year.

The extremes reached in the boom were certainly epic: investors paid $800,000 per resort hotel room and over $500 per square foot for Class A office space, numbers which no terrestrial cash flow could possibly justify. Retail centers sprouted alongside every new exurb subdivision.

cre - commercial real estate

By this logic, an unprecedented boom requires an equally unprecedented bust to work through the excesses in price, debt and risk. So far so good, but there is an anecdotal body of evidence which suggests that profound systemic changes are taking place in the U.S. economy which will structurally reduce the demand for commercial real estate--not for a few years, but permanently.

1. A significant portion of CRE…

Tags: Banks, Ben Bernanke, Commercial Real Estate, CRE, debt, Dollar, Economy, Federal Reserve, Financial Crisis, government, hotels, Housing, Recession, retailers, stores, unemployment, vacancies, Wall Street

Posted in Appears on main page, Permissions, Phil's Favorites | 1 Comment »

Testy Tuesday – Real Estate Edition

by Phil - March 30th, 2010 8:25 am

We have Case-Shiller at 8:30 but that’s not my main concern.

Inflation is much worse than it seems and Doug Kass made an excellent point in TheStreet.com: "Few economists or pundits have noticed that the BLS has increased the weighting of OER to 24.433% of CPI. It had been 23.158%. (Because it’s now declining?) And let’s not ignore the fact that Americans’ misery index in reality is far worse than the above official numbers indicate due to fraudulent U.S. economic statistical methodology. U.S. solons have relentlessly altered CPI, jobs data and GDP statistical methodology to obfuscate declining U.S. living standards. John Williams notes, "On the inflation front, the CPI-U annual inflation rate jumped to 2.7% (3.4% for the CPI-W)…. Adjusted to pre-Clinton (1990) methodology, annual CPI growth rose to 6.1% in December vs. 5.1% in November, while the SGS-Alternate Consumer Inflation Measure, which reverses gimmicked changes to official CPI reporting methodologies back to 1980, rose to about 9.7% (9.68% for those using the extra digit) in December vs. 8.8% in November." Plug in the pre-Clinton or the SGS-Alternate Consumer Inflation Measure as well as a more reasonable nominal income metric — U.S. solons greatly overstate jobs and income — and the American misery index would be more in line with the palpable ire in the U.S.A."

The whole article is a good read on CPI and the fallacy of the Owners Equivalent Rent calculation that has been keeping inflation "in check" for those fantasy consumers that are buying one of the 300,000 homes being sold in the US this year. We talked about it at length last year but it’s very nice to see it getting some attention in the MSM since we are still making policy decisions based on this nonsense. Nonsense won a victroy in California yesterday as Moody’s, S&P and Fitch won dismissal of a negligence and fraud lawsuit by two California investors who lost money on their A-rated bonds. U.S. Magistrate Judge Dale A. Drozd in Sacramento threw out the case in a ruling filed today, saying the investors’ complaint wasn’t specific enough about the alleged fraud.

Ronald Grassi, a retired California attorney, and Sally Grassi, a retired teacher, sued the New York-based companies in federal court in January 2009, claiming they gave high ratings to risky mortgage-backed bonds packaged and sold by Lehman Brothers to curry favor with the investment bank, which filed the biggest bankruptcy…

Tags: AAPL, Case Shiller, CPI, CRE, Housing

Join Member's Chat - 130 Comments Here »

Which Way Wednesday – For Retail Sales?

by Phil - December 23rd, 2009 8:12 am

[Retail sales chart] Remember this from last year?:

Price-slashing failed to rescue a bleak holiday season for beleaguered retailers, as sales plunged across most categories on shrinking consumer spending, according to new data released Thursday. Despite a flurry of last-minute shoppers lured by the deep discounts, total retail sales, excluding automobiles, fell over the year-earlier period by 5.5% in November and 8% in December through Christmas Eve, according to MasterCard Inc.’s SpendingPulse unit. "This will go down as the one of the worst holiday sales seasons on record," said Mary Delk, a director in the retail practice at consulting firm Deloitte LLP. "Retailers went from ‘Ho-ho’ to ‘Uh-oh’ to ‘Oh-no.’" The holiday retail-sales decline was much worse than the already-dire picture painted by industry forecasts, which had predicted sales ranging from a 1% drop to a more optimistic increase of 2.2%.

That was the December 26th headline in the WSJ (the chart is from last year too) which presaged poor Q4 earnings that sent the markets off a 27% cliff from Jan 1st through March 9th of this year. The Dow was at 9,000 last January and managed to fall all the way to 6,500 on those retail results – the same retail results we are hoping to beat by 1% this year with the Dow at 10,500. This will be interesting to say the least. We remain skeptical of the rally but have put up a new, very bullish Watch List as we have identified many stocks we can buy into a technical rally if it holds up into the week after New Years as we begin to deploy some of our own sidelined cash.

We held our short-term bearish stance but our premise is wearing thin as even the 2.2% GDP (20% worse than expected) announcement yesterday was somehow taken as good news by the market. Today the WSJ is touting strong interest in a $1.1Bn CRE auction held by the FDIC as another positive market sign – forgetting the fact that these commercial properties are being sold at 50-90% discounts and are just 3% of the over $30Bn of seized assets the FDIC is sitting on and must sell over the next 12 months (so $1.9Bn short of target this month already).

The FDIC must raise more capital in order to seize more banks as their balance sheet hit negative $8.2Bn at the end of September. They…

Tags: CHINA, CRE, FDIC, GS, MA, Oil, REITs, V

Join Member's Chat - 123 Comments Here »

Which Way Wednesday – Hedging for Disaster

by Phil - December 9th, 2009 8:06 am

We got our sell-off, now what?

Despite generally failing our levels yesterday (see Fibozachi review), the Dow held 10,250 and the SOX were green so we wrangled ourselves back to neutral into the close. Over and over again my best advice to bears in this rally has been to take profits off the table quickly as we rarely string more than 2 days in a row together of downward movement. With that in mind, we moved to lock in our bearish profits ahead of the 3pm stick save which, though disappointing yesterday, at least was predictable as ever.

We even went long on oil futures at $72.50 (after a failed attempt to go long at $73) and we came just short of our goal of $74 this morning at $73.88, which is close enough to take the money and run in the futures (pays $10 per penny per contract). So we’re looking for a small retrace today (up about 0.5%) to retest our levels and then we’ll see how we’re going to play into the afternoon depending on what holds up.

Meanwhile, I think it’s time to revisit the concept of hedging for disaster, something I advocated during another "recovery," in October of last year, where we made our cover plays to carry us through a worrisome holiday season and into Q1 earnings – "just in case." The idea of disaster hedges high return ETFs that will give you 3-5x returns in a major downturn. That way, 10% allocated of your portfolio to protection can turn into 30-50% on a dip, giving you some much-needed cash right when there is a buying opportunity.

At the time, I advocated SKF Jan $100s at $19. SKF hit $300 around Thanksgiving and those calls made a profit of over $280 (1,400%), so putting just 5% of your portfolio into that financial hedge would give you back 90% of your portfolio when you cash out. Keep in mind these are INSURANCE plays – you expect to LOSE, not win but if you need to ride out a lot of bullish positions through an uncertain period, this is a pretty good way to go.

Another play we picked at the time was DXD Apr $55s at $14.20. DXD doubled that same month, went back down to $50 and was back at $90 in March. The nice thing about playing options rather than the stock is the Apr…

Tags: CRE, Dollar, DXD, Euro, FAZ, Gold, Oil, SDS, SKF, SPY, Yen

Join Member's Chat - 200 Comments Here »

Diversified Development Realty Email of Interest

by Zero Hedge - November 13th, 2009 8:05 am

Courtesy of Reggie Middleton

I just received this email and thought my readers may find this of interest. DDR is the company that was featured in the "bailout" post (Here’s a Big Company Bailout by the Taxpayer That Even the Taxpayer’s Missed!), a must read if you haven’t done so already:

I am in the premium xxxxxx business and own a retail store in metro Atlanta. The area that I lease is in a diverse affluent part of town. I believe that this is considered a class A shopping center. DDR is the current owner and this is one of the 28 shopping centers that was put up as collateral for GS in exchange for a 400 million dollar loan that they are going to try to roll up into TALF. To the best of my knowledge DDR acquired this shopping center from Inland a little over 2 years ago.

I believe that DDR paid 22 million for it. Last I heard(this needs to be verified) this shopping center is now valued at 17 million. My lease payments now go straight to goldman sachs commercial mortgage capital. Three years ago this shopping center was nearly 100% occupied, now its about 15% remains unleased. The lease signs in the windows now say short term, seasonal leasing available. This was unthinkable over 5 years ago when I set up shop. All the tenants are up in arms over what we consider fraudulent bills that we are receiving regarding CAM charges. In my opinion DDR is so fiscally screwed that they are resorting to complete slimball tacticts and are possibly truly commiting fraud regarding these new excess bills that we all recieved out of nowhere. In my line of work I am very lucky to talk to rather affluent business people usually higher up the corporate ladder. Many of my customers are in CRE and all of them say the same thing, "CRE is dead, no activity, and it slowly keeps getting worse" DDR’s attitude and behavior is repulsive and arrogant towards their tenants. I have never seen such poor management from any landlord.(I have been leasing for over 20 years, 5 years at this location) The base rents at our shopping center are going down, but only when leases expire. They wont even consider lowering anyones rent if your locked into a lease. Some of the base

…

Tags: Bailout, CRE, DDR, Dollar, Fraud, Goldman Sachs, GS, mortgage, TALF

Posted in Immediately available to public | No Comments »

Capmark Financial, a Top-Tier Commercial Real Estate Lender, Seeks Bankruptcy

by ilene - October 24th, 2009 7:04 pm

Capmark Financial, a Top-Tier Commercial Real Estate Lender, Seeks Bankruptcy

Courtesy of Mish

Commercial real estate continues to show signs of extreme stress. Please consider Capmark Said Ready to File for Bankruptcy.

Capmark Financial Group Inc., one of the nation’s largest commercial-real-estate lenders, plans to file for bankruptcy as soon as this weekend, a person familiar with the situation said.

The much-expected move underscores the deep problems in the business-property market. After suffering from the collapse in residential mortgages, U.S. banks face steep losses from commercial real-estate loans. Capmark has originated more than $10 billion in commercial real-estate loans, according to Moody’s Investors Service.

It also represents a blow to the company’s private-equity owners. In 2006, a group led by KKR & Co., Goldman Sachs Capital Partners and Five Mile Capital Partners acquired the lender GMAC LLC’s commercial-real estate business and renamed it Capmark. As of March 31, the investor group owned about 75% of the company, with GMAC and its employees owning the balance.

The Horsham, Pa., company recently reported a $1.6 billion second-quarter loss and warned it might be forced to seek Chapter 11 bankruptcy protection. KKR has already written down its investment in Capmark to zero.

Adding to Capmark’s pressures, the Federal Deposit Insurance Corp. had notified the company that it must raise capital and boost liquidity at its Utah bank, which has roughly $10 billion in assets.

Capmark Financial Pours $600 Million into its Ailing Bank

Inquiring minds are reading Bank Watch: Capmark Financial Pours $600 Million into its Ailing Bank

Capmark Bank, the wholly-owned Utah industrial bank subsidiary of Capmark Financial Group Inc., agreed to a cease and desist order with each of the Federal Deposit Insurance Corp. (FDIC) and the Utah Department of Financial Institutions. The orders require Capmark Bank to maintain a Tier 1 leverage ratio of at least 8% and a Total Risk-Based Capital ratio of at least 10%.

Capmark Bank reported $11.1 billion in assets as of June 30 and net loss of $261.3 million.

Capmark Bank’s nonperforming loans and foreclosed property assets increased by nearly $240 million from the first quarter to the second quarter and now totals nearly $631 million. About 78% of those assets are related to commercial real estate.

State Arbitrage Game Gone Mad

Joe Weisenthal writing for the Business Insider was on top of…

Tags: Bankruptcy, Capmark, Capmark Financial Group Inc, Commercial Real Estate, CRE

Posted in Phil's Favorites | No Comments »

What Is Plan C And How Will They Solve The CRE Conundrum

by ilene - July 10th, 2009 12:52 pm

Pow! Right between the eyes
Oh, how nature loves her little surprises
Wow! It all seems so logical now
It’s just one of her better disguises
And it comes with no warning
Nature loves her little surprises
Continual crisis

- Life Of Illusion

What Is Plan C And How Will They Solve The CRE Conundrum

Courtesy of Tom Lindmark at But Then What?

The Washington Post has a good article on the Treasury Department’s new task force charged with closing the barn door now that the horses are long gone. It’s called Plan C and their job is to figure out where the next disaster might be lurking in the financial system.

That’s how the Post describes their job. I, on the other hand would suggest that we pretty much know where the problems lie, it’s simply an issue of figuring out how to cope with them. The list includes all the usual suspects, consumer loans, credit cards and of course the elephant in the room, commercial real estate.

The article does a good job highlighting the looming disaster that is CRE:

The officials in charge of Plan C — named to allude to a last line of defense — face a particular challenge in addressing the breakdown of commercial real estate lending.

Banks and other firms that provided such loans in the past have sharply curtailed lending.

That has left many developers and construction companies out in the cold. Over the next few years, these groups face a tidal wave of commercial real estate debt — some estimates peg the total at more than $3 trillion — that they will need to refinance. These loans were issued during this decade’s construction boom with the mistaken expectation that they would be refinanced on the same generous terms after a few years.

The credit crisis changed all of that. Now few developers can find anyone to refinance their debt, endangering healthy and distressed properties.

General Growth Properties, which owns the Tysons Galleria mall in Northern Virginia, one of the most profitable shopping centers in the nation, filed for bankruptcy this spring after it could not roll over its loans. The John Hancock Tower in Boston, one of the city’s most famous landmarks, was auctioned off after its owner defaulted on its debt.

“There’s going to be a lot of

…

Tags: Commercial Real Estate, CRE, CREDIT CRISIS, Plan C

Posted in Phil's Favorites | No Comments »

New York Fed Drowns Hope For Green Shoots In Commercial Real Estate

by Zero Hedge - May 28th, 2009 12:36 pm

Courtesy of Tyler at ZH

New York Fed Drowns Hope For Green Shoots In Commercial Real Estate

Til Schuermann, VP of Financial Intermediation at the Federal Reserve Bank of New York, is testifying today on issues in Commercial Real Estate, and his prepared remarks essentially drown the prospect of green shoots in the context of CRE.

The same cannot be said for loan demand. The SLOOS reports that the net fraction of loan officers reporting weaker demand in April 2009 was 60% for C&I and 66% for CRE loans, a historical low for CRE demand. Weak demand bears emphasis, as it indicates that the observed slowdown in overall credit is partly due to firms’ reluctance to borrow, and not entirely to banks reluctance to lend [someone finally pointing out the obivious].

The combination of acute stresses in the financial markets, together with stresses on bank balance sheets, in the middle of the worst recession in a generation, should caution us from believing that recovery is just around the corner.

His full prepared testimony is provided below.

Testimony before the TARP Congressional Oversight Panel, Hearing on Commercial & Industrial and Commercial Real Estate Lending, New York City

Members of the Panel, thank you for giving me the opportunity to discuss with you some of the recent trends in commercial lending, and especially the role banks have played and are playing in the provision of credit to this important sector. My name is Til Schuermann, and I am a vice president of the Federal Reserve Bank of New York. I wish to preface my remarks by noting that they do not reflect the official views of the Federal Reserve Bank of New York or any other component of the Federal Reserve System.

In early 2007, just before the crisis hit, U.S. commercial banks had $10 trillion of assets on their balance sheets. About 60% was composed of what we may think of as traditional banking assets in the form of loans and leases, and of that about $1.2 trillion or 20% was in the form of commercial & industrial (C&I) lending, and about $1.4 trillion or 24% in commercial real estate (CRE) lending, the topics of today’s hearing.¹ Meanwhile, the sum total of assets at other important non-bank intermediaries

…

Tags: Commercial Real Estate, CRE, green shoots, loan demand, New York Federal Reserve Bank

No Comments »

Phil's Stock World, Stock Options Trading & Information

Daily Stock and Options Tips & Updates; Get Our Daily Newsletter Here

Commercial Real Estate (CRE): The Slow-Mo Cliff-Dive Gathers Speed