Who is to Blame for the Commercial Real Estate Disaster?
Over at Clusterstock, John Carney takes a look at the CRE mess, and assigns lots of blame to lots of people, government agencies, central banks and investors.
He did a yeoman’s job on this overview. I cannot say I am on board with everything he trashes, but he gets a lot more right than wrong. Note especially his pointed commentary about the Fed, how CMBS were allowed such light weight reserve requirements, and the rise of regional and community banks in riskier CRE activities.
The gross data points he cites are horrific:
“Commercial real estate prices have fallen 33% this year and 45% from their peak. Greater than 55% of commercial mortgages are underwater. Some analysts say that as many as 2/3 of the loans may be underwater.
As many as 65 percent of commercial mortgages maturing over the next few years will not be able to qualify for refinancing because of the drop in the value of the underlying property.”
Its worth checking out (despite the obvious click whoring!):
“In a pattern familiar from the housing crisis, the value of commercial real estate has been plunging while the volume of distressed commercial real-estate loans is rapidly rising. The problems in commercial real estate could slam financial institutions, especially smaller regional and community banks, with billions of dollars in new losses. That, in turn, could snuff out whatever chances we have of a sustained economic recovery.
In some ways, this shoe has already dropped.
• The MIT Real Estate Center said that commercial property prices has dropped almost 42% over the past 2 years.
• As a result of that drop, about fifty-five percent the $1.4 trillion commercial mortgages that will mature in the next five years are underwater.
• The delinquency rate for commercial mortgages climbed to 5% in October. A year ago the delinquency rate was just 0.77%.
• About half of all commercial mortgages sit on the balance sheets of smaller banks. So the massive number of bank failures this year is significantly attributable to losses from commercial real estate.
• Late last month, one of the largest commercial real estate finance companies in the world filed for bankruptcy.It’s only natural that you’re asking how the hell we wound up in this mess. Why did a bubble inflate in commercial real estate? Why are smaller banks so disproportionately exposed? What caused this catastrophe?
Good stuff . . .”
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Source:
How A Government Bailout Created Today’s Commercial Real Estate Catastrophe
John Carney
Business Insider, Nov. 16, 2009
http://www.businessinsider.com/the-guide-to-the-commercial-real-estate-catastrophe-2009-11
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November 16th, 2009 at 12:12 pm
Can’t believe we’re once again going to ask all of the same questions we asked during the RTC years, and with the same class of bankers and developers. Who is responsible? Follow the money and you’ll have your answer. This will keep happening until we learn to root out, expose, and punish (economically, or otherwise) those who made these stupid “deals.”
Not to worry, though — it’ll all be fixed with deceptive accounting practices.
November 16th, 2009 at 12:28 pm
I think it’s already been “fixed” with the extend and pretend policy from the Fed where banks will not be punished for extending loans as long as the note is being paid even if the note expires and they would ordinarily be prohibited from refinancing because an appraisal would show that the collateral was no longer sufficient.
http://wallstreetpit.com/11721-commercial-real-estate-losses-extend-and-pretend-is-now-policy
BTW, recent article in the Houston Chronicle saying that the price of office buildings has fallen by half in a year. And Houston’s supposed to be different?
http://www.chron.com/disp/story.mpl/business/sarnoff/6720230.html
November 16th, 2009 at 12:50 pm
At least they can’t blame this on the poor people.
November 16th, 2009 at 12:52 pm
Mike S: They’ll try. It will go something like: If those subprime borrowers hadn’t collapsed the economy, we could have kept this CRE bubble going forever.
November 16th, 2009 at 1:00 pm
Once again, the Investment Banks shoulder much of the blame.
My reasoning:
CRE to a good degree follows new housing development. When new roof tops appear, retailers and office space naturally follows. However this time many of these new roof tops were not legitimate homeowners, but rather were either speculators or subprime borrowers who never should have owned a home and have since left.
Even many of the small banks who were conservative in their CRE lending practices are getting hammered because the supposed growth in residential was just a facade.
Further, the growth in discretionary income of the last decade was also a facade brought about by reckless credit expansion as investment banks increased leverage and took on excessive risk.
Thus the community banks as yet another casualty of their excessive risk taking and leverage expansion. Any bank that was basing decisions based on historical trends and projecting forward is now in trouble because all of the baselines and trend lines have changes.
Ironically, the investment banks who created the collapse are also the first ones to understand the damage that their actions will cause and therefore are able to mitigate and even profit on their own induced damage as it permeates through the economy. Thus Goldman Sachs continues to sell products based on subprime mortgages while quietly making bets that the subprime market will fail.
But all in the pursuit of social good, of course.
November 16th, 2009 at 1:51 pm
It’s the poor people’s fault.
CMBS are loans for what? Commercial buildings, Right? These buildings are filled with who? People, right? Why? Because they work right? Well, what sort of things do these people work on? Stuff for other people, right? Who is poor in America? Most people that want all these stuff, right? Right.
QED.
P.S. Looking for work on Michael Steele’s or Glenn Beck’s writing team, if you know anybody.
November 16th, 2009 at 2:11 pm
Good thing I invested heavily in SRS a year ago and kept adding to the position – oops.
Any theories as to why the above referenced POS continues to trade at or near 52 week lows, given the steaming pile of excrement which is CRE? You may spare me the standard prospectus language about the goal of the fund being to match the inverse of the daily movement in the index x2 and should not be used as a long term investment, blah, blah, blah.
Do I sound bitter? You bet. Nothing worse than being right about the markets and STILL getting hosed – LOL.
November 16th, 2009 at 3:06 pm
not sure why we are surprised about this. after all we have eliminated jobs (offshoring), thus reducing the need for office space, and that reduced the number of customers, reducing the need for retail space. and we already worked on reducing industrial space using the same methodology. and as jobs disappeared incomes fell, costumers had to make up the short fall with loans (provided by our banksters and wall street friends).
and to top if off can we really regulate the banksters (and their partners in crime wall streeters) any w ay?
http://interfluidity.powerblogs.com/posts/1258156478.shtml
November 16th, 2009 at 3:28 pm
Ahem: I cannot understand what the fuss is about: if you have a building where you have rents coming in but they don’t cover the interest payments, why, the bank forecloses on the mortgage and then holds on to the property, and lives of the spread between the rental income (say 4%) and its cost of funds (say 0.25%). If the bank lacks the expertise to manage real estate they can do a deal with a listed REIT which buys the property with a mixture of new loans plus REIT equity.
A large-scale asset designed for rentals is very different from a random set of private residences because the latter were not built optimally for renting and depend on the incomes of the persons living in them.
November 16th, 2009 at 3:40 pm
Slightly off-topic: Meredith Whitney just on CNBC says biggest banks should be trading at Tangible Book Value e.g. BAC share price $15.77, TBV/share ~$9.; JPM share price $42.90, TBV/share ~$20.
Start the stopwatch. Let’s see how long it takes for Dick Bove of Rochdale Securities to appear.
November 16th, 2009 at 3:42 pm
rallip3, but with rents falling because of the lack of demand (or the lack of rent all together), the banks aren’t being made whole either. and they can’t sell it either (no demand).
November 16th, 2009 at 3:48 pm
slightly off topic, but a favorite.
rating agencies got a pass on SEC regulations and criminal conduct back in 2006. so even if there was fraud there, nothing can be done about it
http://www.thebigmoney.com/articles/explainer/2009/11/15/subprime-justice
November 16th, 2009 at 4:36 pm
Barry, you ask: “Why are smaller banks so disproportionately exposed?”
My guess is that they weren’t. The large banks just have better lobbyists and have arranged to get their losses covered by the taxpayer. The small banks will be left to wither, and then the large banks will step in and use their free taxpayer money and taxpayer-backed loan guarantees to buy the small banks (or their assets) on the cheap.
A fantastic deal for large banks. For the taxpayers, not so much.
November 16th, 2009 at 4:40 pm
another possible reason. it was easier to compete for the CRE business since so much of it was local. Lots harder to compete with the big banks on other types of business
November 16th, 2009 at 6:09 pm
Stink’n Social engineering (Freddie and Fannie) I say is the cause.
As it was explained to me by a friend of a banker, the poor people (aka blacks wink wink) were given houses they couldn’t afford since the Federal government forced the banks to loan money to people that couldn’t afford the houses. Then the real people got jealous and wanted bigger houses so they bought houses they couldn’t afford too. Then the whole thing blew up because the government forced banks to loan too much money to lots of people that couldn’t afford the houses and it’s all the result of social engineering/Freddie and Fannie.
I’m sure the same logic applies to Commercial Real Estate.
November 16th, 2009 at 10:16 pm
I do not think that there is one specific person to blame. But we should all realize that it is the cumulative effect of easy money from which many people benefited that caused the issue in the first place.
Of course, those who have been prudent, are in a better position now. And those that spent too much are now faced with a large bill to pay, while the CRE prices are going down.
Hopefully what the Fed does will work and prices will rise again. Time will tell.
admin
http://invetrics.com
November 16th, 2009 at 11:26 pm
The two millionaire CRE investors I know watch CNBC and laugh at me when I tell them they should read the blogs.
I sold my real estate in 2007 and I refused to buy CRE that they suggested.
I’m sleeping – without Ambien.
They aren’t.
November 17th, 2009 at 9:25 am
[...] More on the magnitude of the coming commercial real estate problem (short): http://www.ritholtz.com/blog/2009/11/who-is-to-blame-for-the-commercial-real-estate-disaster/ Aside from the commercial real estate problems that we have yet to face, here are [...]