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Commercial Real Estate Loans Starting To Go Bad At Frightening Rate

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Commercial Real Estate Loans Going Bad At Frightening Rate

Aug. 3, 2009, 6:57 AM|10

Richard Parkus of Deutsche Bank has updated his Commercial Real Estate outlook with Q2 data. Check out how much the situation has deteriorated since the end of Q1.

First, here's where things stood at the end of Q1. The lines on the chart are the percentage of loans that are delinquent, measured by length of delinquency (the black line is the average). Deutsche Bank (bearish) was looking for 3.5% average delinquency by the end of the year.

q1.jpg

And here's where they were at June 30. Deutsche Bank is now looking for 6%-7% delinquency by the end of the year.

q2.jpg

Note that these problems have nothing to do with "liquidity." (Remember earlier this year, when Tim Geithner was blaming everything on a "lack of liquidity"?) These loans are going bad because the real estate companies can't make their interest payments--because the tenants can't pay their rent.

Richard summarizes the situation:

Loan Performance Deteriorating Precipitously

Speed of deterioration in loan performance is unprecedented, even relative to the early

1990s

Total delinquency rate reached 4.1% in June, 2.2 times its March level and 3.5 times

that in December

Delinquency rates are likely to soar higher over next 24+ months on billions of dollars of pro forma loans that never stabilized and resetting partial IO loans

With 2,158 delinquent fixed rate loans ($27.9 billion) special servicers may soon be under pressure

DB CMBS Research projects term losses will reach 4.3-6.3% for the outstanding CMBS

universe ($31.3-$46.4 billion), and 8.4-12.1% for the 2007 vintage

http://www.businessinsider.com/henry-blodg...ing-rate-2009-8

The lines on the latest graph are headed for the moon! :ph34r:

post-16847-1249337681_thumb.jpg

post-16847-1249337714_thumb.jpg

Edited by MOP

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I find this very interesting.

Commercial prices have fallen much more quickly than residential prices. The protection available to commercial tenants in difficulty is much less than than the protection available to residential borrowers so stress is revealed more quickly in the commercial market than the residential market.

One of the themes that I have seen developed over and over again on this site is that prices in the residential market are sticky on the way down and that policy (fiscal, monetary and legislative) will slow down the decline in residential prices.

I cannot disagree with this assessment but I do disagree strongly with those who assume that policy is going to change the outcome for residential rather than the pace at which it occurs.

Politicians and central bankers are able to interefere with the free market mechanisms that determine prices for a while but, in the long run, they cannot change the outcome.

Commercial real estate is leading the way on this downward spiral and residential real estate is highly correlated with commercial but with a larger lag than normal due to policy interference.

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Politicians and central bankers are able to interefere with the free market mechanisms that determine prices for a while but, in the long run, they cannot change the outcome.

You forgot to factor in the mentality of thousands of douche BTLers who are happy to make a loss on their investment every month because property only goes up long term, and you cant go wrong with Bricks and Mortar.

Its irrational, but not impossible.

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You forgot to factor in the mentality of thousands of douche BTLers who are happy to make a loss on their investment every month because property only goes up long term, and you cant go wrong with Bricks and Mortar.

Its irrational, but not impossible.

The more people in the market who believe that you can make up for negative net yields (rental yields - mortgage costs) by enjoying capital gains, the happier cash buyers will be in the long run.

Unsustainable schemes can last for a long time but not forever. This is why I believe that the current "bull trap" is actually a wonderful thing. It will pull even more irrational buyers into the market and keep rational sellers away from selling because they hope that their capital appreciation dreams have been kept alive.

Pent up supply is growing by the day ........

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I find this very interesting.

Commercial prices have fallen much more quickly than residential prices. The protection available to commercial tenants in difficulty is much less than than the protection available to residential borrowers so stress is revealed more quickly in the commercial market than the residential market.

One of the themes that I have seen developed over and over again on this site is that prices in the residential market are sticky on the way down and that policy (fiscal, monetary and legislative) will slow down the decline in residential prices.

I cannot disagree with this assessment but I do disagree strongly with those who assume that policy is going to change the outcome for residential rather than the pace at which it occurs.

Politicians and central bankers are able to interefere with the free market mechanisms that determine prices for a while but, in the long run, they cannot change the outcome.

Commercial real estate is leading the way on this downward spiral and residential real estate is highly correlated with commercial but with a larger lag than normal due to policy interference.

Very well put.

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I find this very interesting.

Commercial prices have fallen much more quickly than residential prices. The protection available to commercial tenants in difficulty is much less than than the protection available to residential borrowers so stress is revealed more quickly in the commercial market than the residential market.

One of the themes that I have seen developed over and over again on this site is that prices in the residential market are sticky on the way down and that policy (fiscal, monetary and legislative) will slow down the decline in residential prices.

I cannot disagree with this assessment but I do disagree strongly with those who assume that policy is going to change the outcome for residential rather than the pace at which it occurs.

Politicians and central bankers are able to interefere with the free market mechanisms that determine prices for a while but, in the long run, they cannot change the outcome.

Commercial real estate is leading the way on this downward spiral and residential real estate is highly correlated with commercial but with a larger lag than normal due to policy interference.

+1

There are plenty of people who are hoping your assessment is right.

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I find this very interesting.

Commercial prices have fallen much more quickly than residential prices. The protection available to commercial tenants in difficulty is much less than than the protection available to residential borrowers so stress is revealed more quickly in the commercial market than the residential market.

One of the themes that I have seen developed over and over again on this site is that prices in the residential market are sticky on the way down and that policy (fiscal, monetary and legislative) will slow down the decline in residential prices.

I cannot disagree with this assessment but I do disagree strongly with those who assume that policy is going to change the outcome for residential rather than the pace at which it occurs.

Politicians and central bankers are able to interefere with the free market mechanisms that determine prices for a while but, in the long run, they cannot change the outcome.

Commercial real estate is leading the way on this downward spiral and residential real estate is highly correlated with commercial but with a larger lag than normal due to policy interference.

To play devils advocate, if no one has any money, you don't need any shops. Whereas people need to be housed. I have often thought, if lots of single people go unemployed, and then start getting their rent paid for them, how on earth is the government going to pay for all that with tax receipts down? Printy printy, or rack up some more debt? How is that sustainable? When will the government not be able to do that or have to reduce rents?

Though, I hope you are right too.

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Defaulting loans on commercial property is one of the main reasons why banks are reluctant to lend.

Loans on UK commercial property amount to £300 billion.

From what I see in my business trips around the UK, there are masses of empty offices, industrial units, warehouses and shops all over the place.

Just cannot see how things can't stop getting worse (for the commercial property sector at least ....) for years to come as companies keep cutting jobs and shops closing as they can't compete with online stores and large out-of-town supermarkets.

A large share of that £300 billion will be lost for ever IMO and the banks just don't want to face up to it.

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It has really taken a hit in the US. Less so over here I think, but I think the US is leading the way. The punitive business rates regime over here means that if you can't let your property out, you pay full rates (often equal to 50% of 'market rent') on the property after a few months. This can make a proposed return of, say, 6% into an actual return of -3%, before repairs and insurance. If you are leveraged by 50% and factor in inflation, you could easily be in for -10% annual loss on your capital plus the loss in asset value. Ouch!

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Defaulting loans on commercial property is one of the main reasons why banks are reluctant to lend.

Loans on UK commercial property amount to £300 billion.

............///

A large share of that £300 billion will be lost for ever IMO and the banks just don't want to face up to it.

That's just the tip of the iceberg I reckon.....

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