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Commercial Real Estate Wreck Looms For Banks

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Commercial Real Estate Wreck Looms For Regional Banks

Published: Wednesday, 22 Jul 2009 | 2:05 PM ET

The commercial real estate beast has begun to expose its claws in earnings, posing the single greatest threat to the banking industry's recovery through the rest of the year.

The contagion from commercial real estate has spread throughout the industry, striking institutions of all sizes. Consider some examples just from earnings released Wednesday:

Morgan Stanley lost $700 million in commercial real estate for the quarter. Though the number actually was lower than the $1 bilion reported last quarter, CFO Colm Kelleher said "we haven't seen signs of bottoming" in the commercial market.

Wells Fargo reported a 69 percent increase in commercial loans where borrowers were not making payments, also known as nonperforming assets. Fitch Ratings said commercial loans would "exhibit significant deterioration over the near to intermediate term" for Wells, though it said the company has mitigation safeguards in place that will help.

US Bancorp also reported rising commercial delinquencies and said it expects the trend to continue for the next year.

Key Corp a Cleveland-based regional bank, missed analyst estimates due to large commercial loan writeoffs. It said nonperforming assets in the category increased to 3.09 percent of its total portfolio, a 30 percent jump from the previous quarter.

HMN Financial a regional bank based in Rochester, Minn., said it saw a $12.2 million increase in loan-loss provisions for commercial and commercial real estate loans for the quarter.

"Banks are writing off commercial real estate loans now at a bigger rate than in the last 20 years," said Kathy Boyle, president of Chapin Hill Advisors in New York. "It's a double-whammy. Banks have another shoe to drop on their balance sheets, and regional banks tend to have a much bigger exposure."

Some analysts had been growing more bullish on the sector as a whole as the contagion from the subprime mortgage collapse seemed to fade.

But second-quarter earnings are showing that the industry now must wrestle with deterioration in the commercial markets, as well as continued consumer weakness likely to be reflected in credit card defaults.

Analysts say they'll be watching regional bank earnings as they accelerate in the coming days. The current poster child for commercial loan troubles, CIT Group is scheduled to report earnings Thursday.

"There are still significant problems in the commercial real estate market," Twibell said. "We're probably in the third or fourth inning of that, whereas in the residential side we're in the seventh or eighth inning. There are so many problems, it's tough for me to get excited about banks despite the move higher."

Continues..................

http://www.cnbc.com/id/32085576

"Economic Crisis Phase 2" is now under way. :)

Edited by MOP

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yep, not keeping businesses afloat as they are bad risks are a self fulfilling prophecy.

dont lend, they bust, landlord loses rent, state loses tax, employees on the dole.

clever clever bankers to bust the system with their risk free lending on highly productive private homeowners real estate.

they deserve every penny in bonuses they "earn"

and bulls think its all over...

I think it might get a bit worse after the holidays.

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SHOPZILLA!

Yep. Then chuck in the rising credit card defaults, Alt-A and Option arms etc.

The first load of sh*t hasn't even dried on the fan yet and the second load is already in flight.

Edited by MOP

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Yep. Then chuck in the rising credit card defaults, Alt-A and Option arms etc.

The first load of sh*t hasn't even dried on the fan yet and the second load is already in flight.

Bernanke, when questioned yesterday about the high percentage of small businesses using credit cards (45% IIRC) said he hoped they would be able to move to a better form of finance soon....yet banks are declining lending LOANS....he is as clueless as a bull on HPC.

Edited by Bloo Loo

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Bernanke, when questioned yesterday about the high percentage of small businesses using credit cards (45% IIRC) said he hoped they would be able to move to a better form of finance soon....yet banks are declining lending LOANS....he is as clueless as a bull on HPC.

A big factor behind the current lull is that SMEs have thrown everything but the kitchen sink (Maxing CCards/MEW/PGs) at staying afloat, clinging on for the mythical upturn. This will all sadly run out before the upturn arrives.

I've always had a strong suspicion that it'd be commercial property that would be the nail in the coffin, it always features prominently in the retrospective post mortems of any downturn.

Of course, plenty of commercial property timebombs in this country. The cycle at the moment seems to be Autumnal catastrophe, Winter stabilisation, Spring conflation of horticultural greens shoots with economic green shoots, Summer go on holiday and pretend debt problems don't exist. Autumn debt problems thrown into sharp relief again. Rinse and repeat.

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The Denninger take:

Commercial Real Estate: Tick... tick... BOOM!

"This time it's different"

Wednesday, July 22. 2009

Posted by Karl Denninger in Macro Economics at 12:57

The state of commercial real estate was one of the most- asked-about subjects in questioning by lawmakers so far in Bernanke’s two days of testimony on the economy. Bernanke said today in the Senate and yesterday at the House Financial Services Committee that it’s too early to tell how effective the Fed’s main initiative in the area will be.

As I have pointed out repeatedly for more than two years commercial real estate tends to lag residential in economic downturns by 12-18 months in terms of severity, and sometimes as much as by two years or more.

This was to my decided advantage in the mid-90s recession when I glommed onto about 8,000 square feet of space in Two Prudential Plaza for an absolutely unbelievable price (about 1/4 of the "going rate" for Class A space) on a five-year lease.

Why? Because Donnelly had literally walked off on it, leaving cube systems and both data and voice wiring, along with a decent amount of office furniture, still in place!

The building had quite a bit of empty space and needed to fix that fast. I had a fast-growing business and needed more space fast. Nice fit eh?

Well, this time is much worse than the early 90s. We had a monstrous residential real estate bubble and both the lending and rent rates on CRE went bananas to the upside during the mid 2000s. I saw it and just shook my head - and what's worse, they're still building in parts of this country, including right here where I live, despite businesses going under left and right.

The overcapacity problem is extraordinarily severe. Regional banks are up to their necks in this paper, and its performance is becoming worse by the day. "FOR LEASE" signs have sprouted like mushrooms, and this will continue.

The unfortunate reality is that a lot of these developments cannot possibly ever perform as originally structured, as the cap rates are off with reality to a degree that is impossible to reconcile. These buildings and malls will never be profitable outside of "huge bubble" conditions, and those are not coming back!

To make it worse the customary financing for commercial real estate, unlike many home mortgages, does not wind up with a clean title. Instead it is more of a "rolling cash flow" scheme where loans are refunded every few years and the owner of the property earns out construction and interest cost on the spread. The problem with this sort of financing is that it relies on ever-improving (or at least stable) business conditions in order to remain stable in the marketplace; a downturn of any severity kills you dead by either killing your cash flow or putting you into a situation where you can't roll the paper at the appointed time at anything approaching a reasonable set of terms.

I fully expect commerical real estate to be at least as bad in terms of severity as residential and it may be worse due to the insane leverage that is usually employed. This will destroy many regional banks (it already has figured prominently in almost all of the bank failures thus far) and anyone who thinks that we will "come out of recession" while there is quite literally another $2-3 trillion worth of bad commercial real estate deals on the books that cannot be refinanced or cleared is simply out of their minds.

What you've seen thus far is just the leading edge of this tsunami starting to curl over; picking up fish under such conditions is not the recommended course of action.

http://market-ticker.org/archives/1250-Com...-BOOM!.html

Oh dear. :ph34r:

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What you've seen thus far is just the leading edge of this tsunami starting to curl over; picking up fish under such conditions is not the recommended course of action.

when these extraordinary events pass into history, i think that phrase will stick

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The overcapacity problem is extraordinarily severe. Regional banks are up to their necks in this paper, and its performance is becoming worse by the day. "FOR LEASE" signs have sprouted like mushrooms, and this will continue.

Most people do not even properly understand the problem

It is a result of decades of malinvestment in the suburbs, betting on cheap oil continuing forever

Now that peak oil has arrived, people will need to shift money away from discretionary retail spending, and towards paying more for transport fuels, ... UNTIL they move away from the suburbs. And as cities gradually redensify, it will be discovered that shopping malls surrounded by parking lots have little business and are in the wrong place.

I saw this coming years ago, and bought the domain name GreeEnergyInvestors to help encourage people to look at the way they were living an investing in a new way.

The world still hasnt caught up in understanding the scale and importance of the malinvestment

I agree that the "problem is extraordinarily severe"

This will destroy many regional banks (it already has figured prominently in almost all of the bank failures thus far) and anyone who thinks that we will "come out of recession" while there is quite literally another $2-3 trillion worth of bad commercial real estate deals on the books that cannot be refinanced or cleared is simply out of their minds.

It may be even worse than the writer of article comprehends

Despite the oil arguments I think people will move further apart and cities and suburbs will depopulate. People moved to cities because that's where the work was not to be near their relatives.

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