‘The Most Serious Wave Of Commercial Real Estate Difficulties Is Just Now Beginning’

[cashinmattress]

‘The most serious wave of commercial real estate difficulties is just now beginning’

Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will reach the end of their terms. Nearly half are at present ―underwater– that is, the borrower owes more than the underlying property is currently worth. Commercial property values have fallen more than 40 percent since the beginning of 2007. Increased vacancy rates, which now range from eight percent for multifamily housing to 18 percent for office buildings, and falling rents, which have declined 40 percent for office space and 33 percent for retail space, have exerted a powerful downward pressure on the value of commercial properties.

The largest commercial real estate loan losses are projected for 2011 and beyond; losses at banks alone could range as high as $200-$300 billion. The stress tests conducted last year for 19 major financial institutions examined their capital reserves only through the end of 2010. Even more significantly, small and mid-sized banks were never subjected to any exercise comparable to the stress tests, despite the fact that small and mid-sized banks are proportionately even more exposed than their larger counterparts to commercial real estate loan losses.

Ok, so we have ended the beginning of the crash...now we start into the beginning of the middle....

[LuckyOne]

I am not as worried about this as some for a few reasons :

- Banks have already taken large losses against these portfolios. There are more losses to come but they will be a continuous event rather than a binary event which is easier to manage.

- The blog is referring to the United States. They believe in creative destruction. A lot of wealth will be destroyed but the system will be able to survive it.

- A lot of capital pools have been formed already to start to accumulate assets once they get cheap. These pools are disciplined and are not buying assets now as they understand the scale of the problem.

The UK housing market is in exactly the opposite position :

- Banks and governments have helped hide inevitable losses through the use of SPVs and policy. The scale of the losses is growing daily and will be unleased in a binary fashion at some point.

- The UK cannot withstand creative destruction with respect to house prices. The entire edifice is based on high and rising house prices.

- The UK housing market is dominated by amateurs who do not understand the scale of the problem. Once in every generation, wealth seems to be permanently transferred from amateurs to professionals. This seems to be about that time.

[cashinmattress]

Banks don't lose, nor does the system that supports it. They will see their money returned in one way or another, unless of course the people can get it together and refuse to do so, but that is a flight of fanciful fiction.

[LuckyOne]

Banks don't lose, nor does the system that supports it. They will see their money returned in one way or another, unless of course the people can get it together and refuse to do so, but that is a flight of fanciful fiction.

Bondholders lose

Shareholders lose

Management usually wins

[Tired of Waiting]

Bondholders lose

Shareholders lose

Management usually wins

Exactly. Since the beginning of the banking crisis this distinction between shareholders and management has been missing from the debate. Shareholder were not bailed out, and lost virtually everything. Whilst management on bonus got rich, for many years.

[LuckyOne]

Exactly. Since the beginning of the banking crisis this distinction between shareholders and management has been missing from the debate. Shareholder were not bailed out, and lost virtually everything. Whilst management on bonus got rich, for many years.

The other part that is missing in the debate about the banking crisis is the fact that debtholders (unusually) have escaped intact.

Sub debt holders should have been wiped out and senior debt holders should have taken quite a haircut before the people's money was injected as new capital.

I think that depositors with balances above the predefined insurance limit should also have taken a bit of a haircut.

[Tired of Waiting]

The other part that is missing in the debate about the banking crisis is the fact that debtholders (unusually) have escaped intact.

Sub debt holders should have been wiped out and senior debt holders should have taken quite a haircut before the people's money was injected as new capital.

I think that depositors with balances above the predefined insurance limit should also have taken a bit of a haircut.

Agree completely. It would reduce the cost to tax payers, AND reduce the "moral hazard" of bailing out unwise investors.