The Wall Street Journal is projecting staggering losses for commercial real estate in 2009, but I wonder if the projections are staggering enough. According to Wei and Tamman at the WSJ:
U.S. banks have been charging off soured commercial mortgages at the fastest pace in nearly 20 years, according to an analysis by The Wall Street Journal. At that rate, losses on loans used to finance offices, shopping malls, hotels, apartments and other commercial property could reach about $30 billion by the end of 2009.
The losses by regional banks on their commercial real-estate loans will be among the most watched details as thousands of banks report second-quarter results over the next two weeks. Many of the most troubled banks have heavy exposure to commercial real estate. So far, 57 banks have failed this year.
The $30 billion estimate is based on financial reports filed by more than 8,000 banks for the first quarter. The trend continued as a handful of major banks reported second-quarter results, including Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Bank of America Corp. Regional banks tend to have higher exposure to commercial real estate than these big financial institutions.
I’ve been looking at some notice of default data for the Phoenix-metro area, and here’s why I think that $30 billion dollar number might be too low.
Yesterday M forwarded me an Excel sheet of "Pending Defaults Over $10 Million In Maricopa County, AZ". There were 146 entries, and the total value of original loan balances was $4.94 billion dollars.
There are a lot of commercial real estate loans for less than $10 million, so clearly there is a lot of commercial real estate going into default that is not in this group. Not all of these properties will go into foreclosure either. I do think though that there’s enough information here to show that the $30 billion figure might be conservative however.
According to this chart produced by Schnepf Ellsworth Appraisal Group in Mesa, AZ, the average price per square foot of commercial real estate in the Phoenix metro area has dropped from its peak at $140/sq. ft. in Q1 2007 to less than $100/sq. ft. in Q1 2009 for a 30% drop. A number of the 146 loans in default were for condominium projects or single family developments which have seen even greater price drops, but if we just assume a 30% loss in value for these loans, we’re looking at a $1.72 billion dollar drop in value. [Most of these loans originated near the peak of the market.]
Because there is a 90 day period between the Notice of Trustee’s Sale and the auction, this data should represent a three month supply of foreclosures, although with lenders working to avoid foreclosures, likely it is more. It is probably fair to assume then that lenders should be looking at nearly $7 billion dollars in losses- and this is only on loans worth more than $10 million, and only in the Phoenix metropolitan area. That’s 23% of the estimated $30 billion in losses by the Wall Street Journal.
Sure this is only a rough estimate, but probably no rougher than an estimate based on the financial reports filed by the banks. I’m not certain what commercial losses are liable to be in 2009, but $30 billion looks conservative to me.
**********************
Note: I asked M what he thought about my conclusions and he had a couple of comments. One is that he thinks the 30% loss number is too optimistic. [As do I, but it was a number I could document.] He also said:
It does appear that the 90 day redemption period which is common in residential RE is greatly extended in commercial RE through postponements, forbearance and waiting for the corporate BK process. There will also be losses from work-outs and "mods" on loans that never are issued a NOD.
Mish's Global Economic Analysis
Ohio Fraudclosure
Bubble Meter
UK House Bubble
Northern Virginia Housing Bubble Fallout
Breaking News Relevant Articles© Copyright 2012 Housing Doom | Copyright© 2011, AuthentiCraft, Inc.
I kind of wondered if a CIT bankruptcy might be one of the triggers for speeding up the commercial RE bubble collapse.
twist,
this is just silly. you’re using things like “statistics” and “data” and “deductive reasoning” to come to your conclusion, while i’m banking on them to just change an accounting rule or two so that it ends up being somewhere near 30%. i’m sure FASB can find a way to reclassify these losses as charitable contributions or something.
very very interesting.. keep up the great work!
how do i get a copy of the $10M maricopa excel spreadsheet?
amazing!
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2296
francis -
Nice dig …
“On Shaky Ground: Commercial Real Estate Faces Financial Tremors”, Knowledge @ Wharton, July 22, 2009.