Maloney: Commercial Real Estate Is a “Time Bomb”
My friend Dawn Kopecki of Bloomberg News just posted an interesting item quoting Joint Economic Committee Chairwoman Carolyn Maloney as saying that the $3.5 trillion commercial real estate market is a ticking ”time bomb” that may lead to a second wave of losses at large U.S. banks. Of course, most readers of TBP probably already know this to be true, but given the run up in financials today it is interesting to see such comments coming from the Congress.
Our view of CRE exposure has not changed at all, namely that the loss rates in that asset class will be multiples of the record loss rates on residential or RES exposures. Why on earth is the Obama Administration still listening to Tim Geithner and Ben Bernanke on the latest PPIP proposal to buy CMBS at current prices when the cash flows are falling every month? If you look at the yields on bank CRE and then extrapolate to the securitization market where much of the CRE exposure resides, there is no way that the pricing assumptions in the PPIP make sense. Guess we have to wait for T-Day for Obama & Co to wake up and smell the bird burning.
One of the questions I ask my clients is this: How do you think prices for exisiting homes and commercial both will react when the RES and CRE properties now in foreclosure work their way through the courts and come popping out onto the secondary market around Thanksgiving? My firm entered a JV with a very experienced asset management and disposal group earlier this year. The view from the disposal channel is ugly.
Excerpt of article below:
Commercial Real Estate Is a ‘Time Bomb,’ Maloney Says (Update2)
(Adds comments on rebound in third, fifth paragraphs.)
By Dawn Kopecki
July 9 (Bloomberg) — The $3.5 trillion commercial real estate market is a ticking ”time bomb” that may lead to a second wave of losses at large U.S. banks, congressional Joint Economic Committee Chairwoman Carolyn Maloney said.
About $700 billion in commercial mortgages will need to be refinanced before the end of 2010 and ”doing nothing is not an option,” Maloney, a New York Democrat, said at a committee hearing today. This ”looming crisis” may lead to significant losses for banks, force shopping center and hotel owners into bankruptcy, and impede economic recovery, she said.
The response by banks to this ”growing threat has been slow and inadequate,” said James Helsel, a partner at RSR Realtors in Harrisburg, Pennsylvania, and treasurer for the National Association of Realtors. ”The lack of liquidity and banks’ reluctance to extend lending are also becoming apparent in the increasing level of delinquent properties.”
Read the rest of Dawn’s article:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aTP9nCROB6PU
Best,
Chris
July 9th, 2009 at 7:22 pm
Maybe they’re waiting for a Jim Cramer
“They’re nuts…they know NOTHING” moment…
July 9th, 2009 at 7:29 pm
Or I know!
Since they don’t know what to do with the detainees at Gitmo, they could turn all the abandoned malls into pseudo prisons…
Make the prisoners wander around the endless shops & food courts & things…
Then, after about 15 years, release them back to their own homelands as some kind of brainwashed American version of the Manchurian Candidate…
July 9th, 2009 at 7:37 pm
”The lack of liquidity and banks’ reluctance to extend lending are also becoming apparent in the increasing level of delinquent properties.”
Well, no shit, Sherlock. As delinquencies increase, you expect banks to want to lend more? Only in America can such myopia and fundamental lack of analytical insight exist.
For a clue on how this movie will play out, see The Curmudgeon’s rather elegant take on the “situation”, and his thesis doesn’t apply only to wages, I’m afraid:
http://www.ritholtz.com/blog/2009/07/nfp-data-dissection/#comment-189221
This ticking time bomb became inevitable when Americans opted to buy cheap Chinese goods at WalMart instead of producing personal jetpacks out of frankin’s nanotechnology labs. I guess it was always inevitable.
July 9th, 2009 at 7:46 pm
I’d like to talk about space beyond this globe and getting off this ball of mud. I realize that most of these links and comments assume we people and our economies will be here and functioning for the next trillion years. If you disagree, you just haven’t considered the long term picture of where we are heading. People will say our economy is vibrant self correcting blah blah, but here we are on the brink of collapse, peering into the abyss, and folks here are talking about thing like commercial real estate markets and other baloney as if it really matters. I argue that our economy and the world’s economy is worthless unless it has an extra terrestrial bonus. That is the pile of beans is nothing unless it helps us open new frontiers. People can point to technology as a way of addressing the increasing set of problems we face in our daily existance. Unless we get to the root problem of overpopulation, we are doomed to failure. There are two ways to address the population issue. One, stop having babies, and two, the exploration and colonization of worlds beyond our local space. The first method might seem simpler until you consider all the drives that go into being human including religion politics and of course our innate desire to procreate. You can dismiss this as a rant, totally unrelated to the topic at hand and go back to counting beans and figuring out how to get a larger percentage of beans then your neighbor, but as you and your neighbors have more children there will eventually come a time when you find you are counting fractions of beans, and do not have enough beans to make your own dinner.
July 9th, 2009 at 8:01 pm
I am amused by how all of these government officials were either quiet or cheerleading during the latest rally and, now that the financials have raised massive funds, it’s back to the fear, uncertainty, and doubt to try and cram through a second round of “stimulus” for politically connected corporations.
Trickle down [to the banks]
July 9th, 2009 at 8:13 pm
I wish the officials would stop menitoning the ‘nascent recovery’ as if this is a done deal.
There is no recovery, what is happening in CRE and downstream securities is of a piece with the other financial failures of the past two years.
We are living the Decline and Fall of Too Much.
July 9th, 2009 at 8:18 pm
@bman
I officially declare you b(ean)man
…
July 9th, 2009 at 8:55 pm
Of course, that’s not why PIMCO pulled out of PPIP?
The way to confirm this developing problem would be, of course, to look at the short and CDS book of GS?
July 9th, 2009 at 9:09 pm
>> Maybe they’re waiting for a Jim Cramer “They’re nuts…they know NOTHING” moment…
LOL. I didn’t share Cramer’s POV (in the video) about helping the corrupt industry/banks that created the problem. But, purely for sensational entertainment, I nominate it for “Best. Rant. Ever.”
http://www.youtube.com/watch?v=rOVXh4xM-Ww
Ah…that brings back memories. Thanks, cvienne!
July 9th, 2009 at 9:19 pm
>> The $3.5 trillion commercial real estate market is a ticking ”time bomb”
I must’ve been asleep or misread some earlier articles. I thought the residential real estate numbers (including prime) were larger than commercial?
If the $3.5T were halved, that wouldn’t be as bad as what we just went thru:
http://www.ritholtz.com/blog/2009/03/us-household-net-worth-falls-18/
Would it?
July 9th, 2009 at 9:40 pm
“The $3.5 trillion commercial real estate market is a ticking ”time bomb”
I don’t know because I’m just another “functionally illiterate” American…
Screw the banks & their loan loss provisions…It would seem to me that the LARGER problem with CRE is the 2nd derivative of EMPLOYMENT numbers that will take a hit when this all comes down…Not to mention the property taxes that states receive from the property, etc. etc.
July 9th, 2009 at 9:56 pm
No, Cramer has called problems in Commercial RE a “canard”. What a tool! I’m surprised people still listen to him.
July 9th, 2009 at 10:05 pm
“The commercial real estate worry is a canard, simply an overpay by some between 2005 and 2007 that will be worked out over time. ”
Jim Cramer
“Don’t Get Talked Out of This Good Market”
RealMoney.com
6/5/2009 11:14 AM EDT
July 9th, 2009 at 10:09 pm
at least this time the losses will not be marked to market…
July 9th, 2009 at 10:10 pm
Bottom calling must be so cathartic… I want to call a bottom in something and see what it feels like.
I hereby declare a bottom in my sex life. Hmm, that didn’t make me feel any better. I hereby declare a bottom in my bottle of whiskey. Ah, that hit the spot and I feel much better.
July 9th, 2009 at 10:26 pm
Not to fear, the FED will ride to the rescue by putting us all more in debt. And all the analysts question inflation? I heard one clown on CNBC the other day who said he was for Congress passing a bill to limit speculation in oil futures because “its a currency”. Really? How much for that loaf of bread,sir? That’ll be one ounce of oil. As far as I know only fiat money and precious metals function as currency. Period.
I hope they do pass the bill limiting speculation in oil futures because those folks are obviously betting on inflation. Then they can move their money into precious metals.
July 9th, 2009 at 10:27 pm
My favorite weekend activity is to count vacant storefronts, some of which have been trying to rent for years already.
July 9th, 2009 at 10:38 pm
@SB
Dude, you’re just living on the edge. lol
July 9th, 2009 at 10:44 pm
Steve Barry:
I have a question for you: I think you have been one of the most vocal about levered bearish ETFs such as FAZ. Today, when I looked at it, it had gone from ~$5 to about ~$55 … and dropping fast. What accounts for the radical price change? I know it didn’t get bid up.
July 9th, 2009 at 10:48 pm
@okie:
don’t follow that one closely…but I think it had a 1-5 reverse split.
July 9th, 2009 at 10:54 pm
$3.5 trillion. Man, that’s a lot of bad weather.
July 9th, 2009 at 10:58 pm
@OkieLawyer:
SB is correct. FAZ reverse-split 1-10, FAS 1-5.
I’m guessing Direxion wanted to be more charitable to put buyers.
July 9th, 2009 at 10:59 pm
matt Says:
July 9th, 2009 at 10:10 pm
Bottom calling must be so cathartic… I want to call a bottom in something and see what it feels like.
Matt,
Just hang a picture of Dubya and Darth Cheney and call a bottom in human evolution.
July 9th, 2009 at 11:10 pm
@tradeking13
““The commercial real estate worry is a canard, simply an overpay by some between 2005 and 2007 that will be worked out over time. ”
Franklin will be happy to hear that…He has a 60 year timeframe…
July 9th, 2009 at 11:12 pm
@matt
“Bottom calling must be so cathartic… I want to call a bottom in something and see what it feels like.
I hereby declare a bottom in my sex life. Hmm, that didn’t make me feel any better. I hereby declare a bottom in my bottle of whiskey. Ah, that hit the spot and I feel much better.
—
LMFAO
July 9th, 2009 at 11:29 pm
Why is it that citizen’s despise, hate, resent, mock etc… our legislators, until those legislators say something that fits their worldview?
July 9th, 2009 at 11:49 pm
@VennData
“Why is it that citizen’s despise, hate, resent, mock etc… our legislators”
Because we know that our simple vote keeps them rollin’ in the whores & yayoe…We RESENT that…
But it’s all forgiven later if it turns out they’re a homie just like us…
July 10th, 2009 at 12:33 am
Jesse explained the FAZ/FAS reverse splits yesterday:
http://jessescrossroadscafe.blogspot.com/2009/07/reminder-reverse-splits-in-leverered.html
Gotta love the graphic.
Saw my FAZ calls up 423% today…time to retire!
July 10th, 2009 at 12:58 am
@Steve Barry
How many closed Steve & Barry’s stores have you counted?
July 10th, 2009 at 7:27 am
@VennData: “Why is it that citizen’s despise, hate, resent, mock etc… our legislators, until those legislators say something that fits their worldview?”
Are you serious? You don’t see a problem with REPRESENTATIVES not representing their constituents?
Remember when Feinstein went against popular opinion?
http://www.youtube.com/watch?v=sZFwRAfkV1g
Would you have just let that slide?
July 10th, 2009 at 6:02 pm
@Cvienne, Thanks
I’ll take that as a compliment. 10 percent of the beans, thats all I ask, put 10 percent towards space, exploration and colonization. We can not expect the government to do it properly, so invest in commercial space ventures.