Rational and Irrational Exuberance in Property Markets
This morning’s Barron’s references Randy Zisler, who runs a RE investment fund out of his office Zisler Capital Associates in Marina del Rey, California.
Zisler has been a real estate investor for some time, and correctly called the top in RE in 2006. His firm recently put out a report entitled “What Causes Bubbles and Crashes, and What Can We Do to Prevent Them?”
The short answer to the first question is excessive and imprudent leverage. Three years into the RE collapse, the deleveraging process has destroyed the credit bubble fed rise in equity. Zisler notes that “Most leveraged equity invested in real estate from 2005 has evaporated, as property prices, if marked to market, have fallen 30% to 50%.” He expects a further decline in CRE property values next year (office, retail and industrial), but envisions an upturn in 2011.
That’s the good news; The bad news is a “massive repricing of all commercial real estate;” Zisler warns of a “crisis of unprecedented proportions”approaching:
“Of the $3 trillion of outstanding mortgage debt, Randy points out, $1.4 trillion is slated to mature in four years, and he estimates another $500 billion to $750 billion of defaults. Maturing debt will have a tough time finding lenders. Debt that has been or will be marked to market, he predicts, will render many banks, especially of the regional and community kind, insolvent, since much of the debt is worth half or even less of par value.”
Zisler’s Slide Show was included in the California State Controller’s Office report on the state’s finances; You can download it at their site; more of Zisler research can be found at their own website.
>
Sources:
Bubble Slide Show from the ULI Presentation
Zisler Capital, 11/9/2007
2009 Research
http://zislercapital.com/research.asp
Mind the Gap
ALAN ABELSON
Barron’s NOVEMBER 16, 2009
http://online.barrons.com/article/SB125815697982347765.html
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November 14th, 2009 at 7:46 am
If I can get Scribd to upload it, I will post in the Think Tank
November 14th, 2009 at 7:57 am
By the way, I have another idea for the Ritholtz empire:
T-shirts that say something like: Barry and I lived through the Great Recession.
Given away for new clients, best Friday night jazz idea, Goldman Sachs caricatures…etc.
…Outdoors today, magnificent Indian Summer weekend here in East Tennessee…
November 14th, 2009 at 8:01 am
…it’ll be so bad that prices will go negative, people will be paying you to take their real estate.
November 14th, 2009 at 8:49 am
When I drive the 3 miles to my favorite restaurant on Sundays, I pass about 350,000 square feet of vacant CRE…some of it vacant for years already…and this is in one of the most affluent areas in the US. If I took a mile walk after eating, I would find quite of few vacant condos listed in the millions. Who is carrying the costs on all this RE? When will they buckle? Will it be a pancake collapse? The clock is ticking…
November 14th, 2009 at 9:05 am
Who is carrying the costs on all this RE? When will they buckle? Will it be a pancake collapse? The clock is ticking…
——-
BAC?
WFC?
Fed?
November 14th, 2009 at 9:13 am
Isn’t $750 million divided by $1.4 trillion only 1/2 of 1%? That doesn’t sound like a crisis. Perhaps he meant $750 billion.
November 14th, 2009 at 9:25 am
For all intents and purposes we may not need to build another office building, retail establishment or residential structure for a couple of decades. Obviously the forces of creative destruction, innovation and mobility will always generate some activity, but from the standpoint of total demand and supply, we are done.
Simple math. If vacancy rate is 15% and annual growth is 3% = 5 years capacity. If vacancy rate is 15% and annual growth is now 1% = 15 years capacity.
November 14th, 2009 at 9:30 am
So I got that going for me…
July 12th, 2007 – Paulson: “This is far and away the strongest global economy I’ve seen in my business lifetime.”
November 14th, 2009 at 9:38 am
> Who is carrying the costs on all this RE?
Something like a quarter of all commercial mortgages went into securitizations. However, securitized lending probably accounts for more than a quarter of speculative CRE. The unsecuritized loans came primarily from banks and insurance companies.
> When will they buckle? Will it be a pancake collapse?
It’s buckling right now. The largest floating rate loan, $6BB used to purchase Extended Stay Hotels, is being renegotiated to something like a third of its original value. The largest fixed rate loan, $5.4BB used to purchase Peter Cooper Village & Stuyvesant Town in NYC, has just been transferred to the special servicer for workout. I don’t see a pancake collapse as only so many loans can be worked out at any one time, but the wheels certainly seem to be coming off.
November 14th, 2009 at 9:42 am
“…Lastly, consider the plight of the commercial property arena in Southern California. Distress among the legion of white collar firms has resulted in a hemorrhage of office property thrust upon the market. The region is bleeding enormous office space. Almost 51 million square feet of office space in Los Angeles County, Orange County, and the Inland Empire is now empty. That is more than 17% of the total. The exodus from office buildings that began in late 2007 has actually accelerated during 3Q2009. No recovery there. The anemic business climate continues to take its toll on the commercial real estate rental industry. Vacancies stand as a direct reflection of unemployment. Companies cut back on workers, end leases, and struggle to survive. Some shut down and liquidate. The volume of idle office space in four counties is staggering. The vacant office space is a mind-bending 1200 to 1300 square miles of vacancy in just four counties of Southern California. The problems in commercial real estate are so huge, that they are hard even to grasp. Worse, bank losses have yet to hit the balance sheets on such commercial loans. Does an interest rate hike come amidst vast acreage of vacant office space, led by Southern California? Never confuse Wall Street liquidity revival with economic revival.
Copyright © 2009 Jim Willie, CB
Editorial Archive
http://www.financialsense.com/fsu/editorials/willie/2009/1106.html
also, to Note, People would do well by adding http://www.financialsense.com/index.html to their rota of Inputs.
~~
Steve Barry, (y danm),
you’re asking: “Who is carrying the costs on all this RE?” A: you(s. & pl.) are.
or, differently, “What don’t We understand about QE?” Anyone that is exposed to the U$D, the imputed value thereof, is bearing the ‘Cost of Carry’ for these broken Balance Sheets.
or, differently, yet again, Illiquidity only masks Insolvency..it never fixes it..
IOW, Finance, at best, merely, mirrors Economics, though, usually (at worst) serves to perturb/distort it(Economics).
Illiquidity is a Financial Problem..Insolvency is an Economic one.
November 14th, 2009 at 10:46 am
I did a double-take when I read “credit bubble fed rise in equity.”
The first time through, I thought you meant the Fed not the verb fed. It kind of works both ways.
November 14th, 2009 at 10:51 am
“That’s the good news; The bad news is a “massive repricing of all commercial real estate;” Zisler warns of a “crisis of unprecedented proportions”approaching:”
Already been there, done that, got the t-shirt….
November 14th, 2009 at 10:56 am
MEH and others who answered my rhetorical questions:
On a macro level, it is clear what is happening…every Friday night, a little air is let out of the bubble as regulators meticulously closes several regional banks. They are doing a few a week, but likely could close hundreds right now. The TBTF banks are just that… TBTF and ultimately their losses are backstopped by the taxpayer. The closed banks have their insolvency absorbed by the FDIC and institutions that pick up their deposits, so again the taxpayer gets hit. But the taxpayer does not get the entire hit, as property owners must be talking some hit as well. Quantifying that may be impossible…it is a factor of ownership structure and how each individual owner can play the bankruptcy system to avoid being on the hook personally. Then there’s that old axiom…borrow $100 and that’s your problem…borrow $1 Million and it’s the bank’s problem. Add in securitization and there is no way to predict how the details will play out, but as this CRE sits vacant, the landlords are still paying taxes, upkeep and likely a high LTV underlying mortgage to someone. At some point they will have to stop, but again every individual case must be different there is no way to predict how the final climax will occur. But as long as that space stays vacant, implosion of some kind is inevitable.
November 14th, 2009 at 11:01 am
Just what we need:
http://www.bloomberg.com/apps/news?pid=20601103&sid=aA4Gukum9lY8
Dudley Do Right would like to increase the expectation of future government bailouts to risk-takers who don’t offer enough transparency to convince the market of their solvency.
[smacking hand to forehead]
November 14th, 2009 at 11:03 am
I will add that bubbles pop at their weakest spots…so while the Federal gov’t thinks they have saved us from the brink with their money printing, I do see on spost that has been left uncovered…state governments…I posted this week an article that 10 states are in deep doo doo, accounting for 30% of the US population…and that list did not even count NY, where the governor stated this week that “We’re going to run out of cash in four and a half weeks. We are going to run out of money. Unless we do something about it, (it will) threaten generations…”
November 14th, 2009 at 11:11 am
Zisler wrote:
“Debt that has been or will be marked to market, he predicts, will render many banks, especially of the regional and community kind, insolvent, since much of the debt is worth half or even less of par value.”” –
Yes, but only IF Chairman Ben and Secretary Tim don’t get their way and don’t devalue the dollar as much as they hope to. They only have to drop the value of the USD by 2011 to below 50% of what it was worth in 2006/2007, and the debt that’s now worth 50% below par will magically be @par again(in NEW dollars of course.)
And guess what? Ben and Tim will be praised for averting the CRE crash, Cramer will scream about the new bull market (with securities priced in worthless dollars,) and bankers will up their bonuses by 100% in order to “keep up” with bank earnings…. 295million of “other americans” – those who draw most of their income from somewhat fixed salary, pension, social security, unemployment benefits, etc (but not from investments banks, CRE, oil futures trading, or insider tips on penny stocks) will grumble, but will go on. The new American Sheep… A hurd led by The O-team of Ben, Tim and Larry… praying that Lloyd & Co. continues to do G*d’s work here on Earth…. booyah indeed.
November 14th, 2009 at 11:19 am
Also in Barron’s…
A Tale of Two Credit Markets – Randall Forsyth
http://online.barrons.com/article/SB125815671249547689.html
“Cisco …had to pay just 100 basis points … more than the benchmark 10-year U.S. Treasury note …On the $2 billion, 30-year portion, the spread was just 130 basis points over the borrowing cost of the U.S. … So much for the notion that the federal government’s borrowings would crowd out the private sector…”
So much for the crowding-out crowd… That’s YOU Rick Santelli and your tea-sipping old ladies friends.
And Also from Barron’s “Sampling of Advisor’s Opinions” from Cuttone and Co. there’s also…
“…Interestingly, many of those who dismissed Dow 10,000 as a meaningless number have gone on to speak about the devastating psychological importance of 10% unemployment…”
…That’s YOU Rick Santelli and your teabagging buddies.
November 14th, 2009 at 11:20 am
wunsacon:
the Bloomberg article starts with htis:
“Federal Reserve Bank of New York President William Dudley said the central bank could curtail the risk of future liquidity crises by providing a “backstop” to solvent firms with sufficient collateral. ”
There’s only one financial company that during the crisis in Sept 2008 would probably fit this description of solvent, but suffering from liquidity collapse. And it is… **drum-roll please…** (you’ve guessed it) Goldman Sachs!
And just to remind you, Dudley worked as Chief Economist at GS before going to the NY Fed as chief trader first (talk about those GS “trading” profits) , then taking Timmy’s place.
November 14th, 2009 at 11:22 am
“Yes, but only IF Chairman Ben and Secretary Tim don’t get their way and don’t devalue the dollar as much as they hope to. They only have to drop the value of the USD by 2011 to below 50% of what it was worth in 2006/2007, and the debt that’s now worth 50% below par will magically be @par again(in NEW dollars of course.)”
Is this really possible? The foreign governments that own trillions in US paper would have to be mad to stand for this…wouldn’t they just print their own money and buy dollars? Look at the following graphic on the cycle of deflation from the Comstock Fund…if they are right, we are right now at “devaluation” and next comes “competitive devaluation” which supports my longstanding notion that we are in a deflationary debt crash.
http://prudentinvestor.blogspot.com/2005/07/chart-of-day-deflation-cycle.html
November 15th, 2009 at 8:38 am
Nov. 13 (Bloomberg) — Investment bankers are wielding their political influence to override popular support for legislation to break up lenders’ trading and retail operations, economist John Kay said.
“You have a group of politically powerful oligarchs, whom other people hate, but who are entrenched there,” Kay, a visiting professor at the London School of Economics, said in an interview yesterday. “It will require something of a political earthquake” to reduce the bankers’ sway, he said.
November 15th, 2009 at 10:07 am
Barry,
I think the report says $ 500-750 BILLION not million.
My source on that is Dow Jones Market Talk
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BR: Fixed!
November 15th, 2009 at 10:26 am
I also just read David Wilson story on Bloomberg quoting $500-750 Billion.
November 15th, 2009 at 10:27 am
Sorry, I didn’t realize
November 17th, 2009 at 10:01 am
[...] Zisler Associates (mentioned recently here), included in a recent report on the state’s finances issued by the California State [...]