Posted on 11/20/2009 1:40:22 AM PST by bruinbirdman
The long-feared financial disaster is still looming. Bad court decisions could set it off.
The commercial real estate market is on its last legs and unless drastic actions are taken, the effects on the broader economy will be catastrophic. The obvious problem is the excessive amount of debt placed on the properties and the amount of debt that has to be refinanced during a relatively short period of time.
Between now and 2013, at least $1.3 trillion of financing comes due, of which $160 billion was the result of securitizations. Unfortunately, as a result of the virtual disappearance of the secondary market, the weakened condition of the banks, and the amount of debt already held by insurance companies and pension funds, even under the best of circumstances, less than half of the outstanding debt can be refinanced. This is compounded by the collapse of the commercial rental market in the last 18 months as a result of the Great Recession. For example, office rents in prime areas of Manhattan that were in the $100-$120 a square foot range in 2007 are now trading (with rent concessions and work letters) at half that amount.
After two years of one financial crisis after another, the Fed has fewer cards to play, and the foreign investors who bailed out commercial real estate investors in the past are sitting on the sidelines waiting for the prices to collapse. This problem is exacerbated by the lingering effects of the recession: absence of credit; growing job losses as a result of falling prices, consumer demand and credit; the insolvency or near insolvency of so many institutions; and the loss of confidence in the U.S. economy by our trading partners.
In the last few weeks there have been a series of court decisions that will have repercussions.
(Excerpt) Read more at forbes.com ...
I love that everyone around here is still pretending inflation will ever be an issue facing the current american dollar ever again.
LOL. It’s just people wishing and praying for the least-worst outcome.
We’re facing a deflationairy title wave. Sell everything for whatever cash you can get because pretty soon people will literally murder to get their hands on a dollar.
Look for an increase in fires in these properties. Nation-wide and local. It may start right after the (non-shoping binge) Christmas holiday.
The guys with the sharp pencils and green visors will look up and say: “It’s all over Charlie, better sell it to the insurance company”.
If they burn it down, the taxpayer covers the “insurance” because they are all broke. That’s why be bailed out the insurance industries version of Fanny and Freddy, AIG; The whole industry was going to collapse if we didnt.
I love it. Anti-bailout fever insures no help is coming. The Dems hate the commercial real estate owners and recognize killing them kills RNC donations from them. The GOP cant touch a bailout.
So they crash and take us down with them, the country done in by the politics of “me me me, screw you you you”.
Most small businesses and retailers are just holding on till the xmas shopping season is over, to take in the last bit of cash they can. But once the reality of the worst xmas in decades sets in, stores and businesses will close, employees will be let go and the commercial bankruptcies will start to pile up.
There will be another spike in unemployment claims followed by more defaulting on unsecured credit, foreclosures on homes and a spike in personal bankruptcies...
I just don’t see anyway around it and I don’t see anyway through it either.
Property tax revenue from commercial real estate is the bread and butter of most cities. This does not bode well for them.
They’ll just raise taxes on home owners. Cutting the budget is against their religion.
Freeper Bankers/Financial Wonks of all stripes, please chime in and let me know where my analysis is wrong.
Entrepreneur “A” goes to a bank and gets a loan for $500,000 to rent space, get product, and hire employees. Bank agrees with the stipulation that they begin to pay back in 3 years. In the mean time, the mall which rented out their space to “A” also went to a bank for a $50,000,000 loan with the agreement to begin paying back in 3 years.
Problem, after 3 years, neither the mall nor the entrepreneur have made enough to begin paying off their loans, so a few options exist. 1)default on paying the loan, 2)get another loan, 3)go out of business.
So if too many businesses or commercial properties default on their loans, it will be like the banks lost all of their money they loaned out. If the banks were counting on the revenue from that money, then the banks can fail and all of the money in them (guaranteed by the government) is supposed to be covered. BUT where does the government get the money to cover a large amount of bank failures? They don't, our money or wealth secured by banks becomes zero in a day and the only thing that has worth is gold, guns, ammo, food, and real abilities in survival.
Is that about the extent of it????
Some courts and almost all legislators (more lawyers) assume that business behavior will not change. Illegal foreclosure prevention occurred in the 1930s too. It was one of the pieces that turned a nasty recession into a Depression.
What effect with the Commercial real estate collapse have on home prices, and what will happen to interest rates?
I suspect the more nefarious banks will start to call in their loans from homeowners to try to maintain their financial status. I don't know how taking over millions of homes will help but they can convert the mortgage monies into rents and the payments will be counted as income at a much greater rate.
Because of the high interest rates coming your equity, if you have any, will become more valuable. If you are upside down - forget it.
The banks are caught in a squeeze; the Feds demand that they unlock credit and then the examiners come in and beat the crap out of the banks for risky (under current standards) loans.
As to commercial real estate, banks in my area on commercial properties with maturing leases of five years or less are discounting income streams up to 30%. Also they are assuming a vacancy and credit loss of 10% and an increase in the capitalization rate (a rate of return measure) to 8.5%-9.0% as a risk premium. It is damned hard to make a seasoned building work with those numbers. Lastly loan to values have dropped from 60% down to 70%.
No fun being a highly leveraged building owner these days.
More coffee!~
Lenders should not be required to appraise real estate that they own, are part of special assets or the subject of workouts using a mark-to-market standard but, recognizing the current aberration in the market place, using a "fair value" approach that recognizes the need to sell in an orderly transaction. What helped to destroy the S&L industry in the late 1980s and bring on the last real estate recession was the need of solvent banks to mark the real estate assets to market.
The City of New York (and the taxing authority in other jurisdictions) should reduce the real estate tax assessments on commercial properties to reflect the loss in value rather than making owners pay real property taxes based on assessments that are no longer relevant and then wait years to obtain a refund to help offset lost revenues.
So owners of commercial real estate should not be required to carry commercial assets at mark-to-market rates - but their tax burden SHOULD be determined at market rates.
Did the writers of this editorial even bother to grasp that inherent contradiction?
CPA here. You have just hit the nail on the head. My boss has lots of commercial real estate (seperate from the business)and our banks arent lending squat.
Its coming...and its going to be nasty
Bump to remember someone published information to scare everyone so they could buy things cheaply.
30 years in banking and commercial real estate. You are spot on. It is worse than even YOU might imagine.
“They’ll just raise taxes on home owners. Cutting the budget is against their religion.”
For many cities, the bulk of the homoeowners within the city limits are in the lower income range. The affluent moved to the suburbs years ago.
Won’t matter.
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