Unrealistic assumptions, multiple layers of investors, and stratospheric prices, helps illustrate why this downturn is more complicated than previous ones…
I don’t know about you, but I’m so tired of hearing about supposed "green shoots" that I’m ready to forgo the salad bar any more. When you dig behind the green stuff though, you start reading things like the above quote from Michael Panzer’s A Tsunami Of Red Ink. This tsunami is in commercial real estate:
Already, prices have plunged 41% from the peak in 2007, according to Moody’s/REAL Commercial Property Price Index—worse than the 30.5% fall in the housing market from its 2006 apex. "We’ve never seen this extreme a correction as far back as the data go, which is the late 1960s," says Neal Elkin, president of Real Estate Analytics, the research firm that created the index. Adds billionaire investor Wilbur Ross: "Commercial real estate has gone from being highly liquid at sky-high prices to being extremely illiquid at distressed prices."
To appreciate why this bust is like no other, first consider the typical commercial real estate downturns that used to crop up every 5 or 10 years. The pattern was predictable: When prices for apartment complexes, office buildings, shopping malls, and other properties began to rise, developers sped up their projects to cash in on the bull market. Eventually, some of those developers, unable to fill all the new space, began to default on their loans, and lenders were stuck with the buildings they’d financed. The slump lasted no longer than the time it took for the property glut to be worked down.
But overbuilding isn’t the culprit in this bust. An oversupply of money is what pushed commercial real estate over the edge.It turns out the same excesses that drove the housing market’s crazy rise and fall were present in commercial real estate, too—but they have largely gone unnoticed until now. Bankers, in their haste to make more and bigger loans, blindly accepted borrowers’ wildest growth assumptions and readily overlooked other shortcomings on loan applications. They did so in part because they could easily sell their dubious loans to investors in the form of commercial mortgage-backed securities. As the market overheated, it became a breeding ground for fraud: A flurry of new court cases reveals the disturbing extent to which commercial mortgage borrowers may have doctored loan documents.
So how bad can this wave get?
While the housing crisis seems to be easing, the commercial storm is still gathering strength. Between now and 2012, more than $1.4 trillion worth of commercial real estate loans will come due, according to real estate investment firm ING Clarion Partners. Analysts at Deutsche Bank (DB) estimate that borrowers will have trouble rolling over as many as three-quarters of the loans they took out in 2007, the most toxic vintage.
For the banks and investors whose money fuels the economy, this presents major problems. Their losses will likely cast a shadow over lending—and, by extension, the overall economy—for years. The market won’t fully recover until 2020, says Kenneth P. Riggs Jr., CEO of Real Estate Research, and in cases where "values were over the top…maybe never."
I disagree with Panzer that the housing crisis is easing. Home sales have been brisk- but government funded and only in the bargain basement. Foreclosures are down, but mods don’t seem to be working. Heck, Fannie’s just happy to get renters in her homes any more. I do agree though that that CRE has a lot of trouble ahead of it- and the combination is liable to be rough on lenders.
“It turns out the same excesses that drove the housing market’s crazy rise and fall were present in commercial real estate, too—but they have largely gone unnoticed until now.”
really??? i guess it went unnoticed to those who paid absolutely no attention?
“blindly accepted borrowers’ wildest growth assumptions.”
well with ten brand new residential developments going up around a lot, it was prolly easy to accept such assupmtions about growth??
“But overbuilding isn’t the culprit in this bust. An oversupply of money is what pushed commercial real estate over the edge.”
That makes no sense. By that logic I can just tell my wife, “But overeating isn’t the culprit in this waistline. An oversupply of candy (from all my co-workers Halloween leftovers) is what pushed the scale over the edge.”
village idiot -
I think it’s safe to assume greed is a constant
Village Idiot-
I don’t think he was going for a Twinkie Defense here, I think his point was that this time, it wasn’t so much an overreaction to market forces as easy money looking for a home- and finding a lot of crooks and speculators willing to help.
Before the housing/commercial real estate disaster can come back there is one more shoe to fall on this Economy From Hell – the currency.
You CANNOT run trillion dollar deficits and PRINT the money and not have the currency crumble. We ain’t seen nothin’ yet.
Ironically the dollar collapse will be the turning point. We’ll be able to start over, our exports will be cheap internationally and – who knows – we might even get a manufacturing base back.
I don’t follow the commercial real estate market, but I remember Twist and others predicting that the commercial market would be next.
That was a while ago, but…
it seems that commercial real estate’s chickens….have come home…to roost.
I once read not long ago that Americans had 23sqft to shop in for every man woman and child. Our next nearest competitor was Germany with 2.5 sqft. Don’t look now but that sounds a little overbuilt to me even considering that Americans need a little more room than most.
Mylegacy – our only saving grace is that every other country affected by this mess appears to be doing the same thing. Currency values are relative, and if everyone prints like crazy, the net effect should be zero.