Subscribe to this BlogThe commercial real estate time bomb
There’s a new main character moving to center stage in the great real estate meltdown. Underwater homeowners vying to refinance or score a loan modification have grabbed much of the headlines (and bailout attention) to date. But now commercial real estate is moving into the spotlight as the next potential body slam for the economy.
Last week The Washington Post reported that the U.S. Treasury department has begun to contemplate what can muck things up for the economy and the recovery beyond what is currently being bailed out. This effort has come to be known as Plan C. As in, “Yikes, Plan B might not do the trick, so what do we need to focus on next?”
Reports the WaPo, "The officials in charge of Plan C — named to allude to a last line of defense — face a particular challenge in addressing the breakdown of commercial real estate lending.”
The story line reads like a sequel to the residential debacle: Commercial property owners are sitting on loans that need to be refinanced. The Real Estate Roundtable estimates that about $400 billion a year in commercial loans will need to be refinanced over the next decade.
But with commercial property values way down, vacancies way up, and the recession making it unlikely there will be a demand pick-up anytime soon, banks haven’t been inclined to offer refinancing deals. If they do open the spigot at all, the terms are nowhere near as cheap as what commercial property owners had enjoyed during the boom. Sounds familiar, eh?
Earlier this month, in testimony before the Congressional Joint Economic Committee, Jon D. Greenlee, the Fed’s associate director of banking supervision and regulation, summed up the Plan C worry: “At the end of the first quarter [of 2009]," he testified, "about seven percent of commercial real estate loans on banks’ books were considered delinquent. This was almost double from the level a year earlier.”
Greenlee says there is about $3.5 trillion of outstanding debt associated with commercial real estate, and banks had about $1.8 billion trillion of that tidy sum on their books. That computes to about $126 billion (so far) in delinquent commercial mortgages on the banks’ books.
Now if you’re Goldman Sachs, you might be able to absorb commercial real estate writedowns (reportedly of more than $1 billion) with record trading profits elsewhere. And, to be sure, the vultures are already circling in the hopes of picking up distressed commercial property.
But if the squeeze on commercial real estate is as persistent and pernicious as what we’ve seen in the residential market, it wouldn't exactly be a shock if the government beefs up its support/bailout. Get your taxpayer dollars ready for Plan C.
How about we possibly fix the home mortgages before we decide to move on to something else. I've been waiting on that for three months now.
I own a mortgage company in Michigan for 10 yrs. Our business principles did not involve sub-prime loans, even though the sales reps (from the BANKS FOLKS) always tried to sell these products to us! Yep, you heard me. The banks are the ones who designed the sub-prime products, hired reps to sell them to the brokers.
My business has suffered terribly the past 18 mths. Our production is down. Clients do not trust brokers, when the truth is they shouldn't trust the BANKS who sold the bag of goods! Oh, then the banks get bailed out. Good job to our government officials who know the truth.
Since the production is down I had to lay off 17 employees. I own my commercial building and am about ready to walk away. There is truly no hope in sight. I have ALWAYS prided myself on good credit, instructed people how to repair their credit and keep it. Now I am living the life of a possible commercial loan foreclosure.
I ask this, Mr. Obama what will fix this? How do I explain this to my children?
Commercial real estate is mostly tied up to the economy as a whole and residential real estate is a part of the economy as a whole and will always have some influence on the commercial market. The way to bail out or prevent the commercial real estate from collapse is to fix the Economy as a whole….Jobs has to be created in a sustainable manner for stable growth…
if the fed bails these business out I will have lost all faith in Mr Change. If a single person that bought a property as an investment cant benefit from a bailout then why should businesses that are mostly owned by one, maybe 2, investors?
Our church has to refinance its "commercial property" loan on its land and building. We do this every three years an the residual loan is now a fraction of its original amount. The bank who had the loan was taken over by the Feds who will not allow it to renew a church loan, I suspect for reasons more than economic. Nobody out there is willing to refinance the loan, even with several appraisals indicating the remaining loan to value ratio is less than 20%. It would be 80% pure profit for a lender if we did default and they had to forclose… and after 9 years of paying on time, I doubt that would be much of a risk… but instead, we will be forclosed on now, end our community ministries sticking it to the government, stick the government owned bank with a property it can't use, and lose the opportunity to serve our Lord. We have learned the lesson: The borrower is slave to the lender. If we can get a bridge loan for 6 months, we will pay off the mortgage in full. Please pray for us.
The residential real estate market is definitely in a big mess and it only makes sense that commercial real estate will follow. Let's hope we emerge from this even stronger.
Regards,
Jan
Lending is taking risks. The commercial real estate risk in income producing property is the income risk. So goes the income – so goes the value. In lending on projects whose value materially exceeds the net worth of its owners, the lender becomes the defacto owner and the title holders are the stewards of the investment. If the income goes, the lender can fix his loss by selling under a cloud or he can operate the property until better times prevail. Because most lenders are stewards themselves for individual investors, they recommend holding through the down period. Anything less and they would be guilty of imprudence in a market that is on the mend side of the cycle.
People who are all gung ho about Western Europe's "socialist" system should take a closer look at the economic malaise that's taken over France as a result of this system. Small countries such as Norway, whose energy production creates wealth, makes it easy to become a "socialist" state without concerns for the inefficiencies of running such a state. A large population such as the U.S. will not allow a feasible socialist system. China attempted this and has utterly failed – visit them and see how well they are executing it – it's so bad that they have had to turn to capitalism for an infusion of cash by taxation in order to bring socialized programs to the masses. Ironic to the nth degree.
When putting "them" up against the wall, don't forget to add the college professors that taught business administration and the way things should be done. From Enron on down, our "best and brightest" have proven to be failures. Wall Street wants to give bonuses so as to prevent a "brain-drain"? How crazy is that? "If you don't have an MBA, you can't work for us…" Why not? Could I possibly do worse?
How is it that Goldman has only written down 1 billion of the 126 billion in Comm RE writedowns. Are you telling me that G.S. is less than 1% of market share?
Those of you attempting to blame "capitalism" or the "free markets" for the current credit depression — because, yes, that's what this is, Virginia — need to study up a bit more on your history. Every downturn before the depression of the 30s (they use to call them panics) was allowed to follow it's natural course with minimal interference from the government. The depression of the 30s was the result of the first significant government interference in the economy, via the interest rate games of the newly created Federal Reserve (circa 1913) …and look how that turned out. Incidentally, that depression was the last credit-driven downturn prior to this one.
Government interference in the economy amplifies and worsens "natural" economic fluctuations. Government interference in interest rates artificially influences every aspect of the economy. Government interference in trading (bans on short selling? really?) artificially influences that activity. All of this influence adds an additional wild card to what would otherwise be largely self-regulating systems — all the government should be doing is enforcing the very most basic rules of the game (e.g., contract law).
"That government which governs least, governs best."
Our political lexicon deliberately confuses "Rich" with "High Earners".
Government's thrust to secure ever increasing amounts of income will prevent large numbers of people from becoming rich, by redistributing through taxes, transfer payments and wages to government types, the wealth earned by "High Earners".
The rich are, and will be, mostly unaffected.
They're rich, they don't need to work, they don't need to put capital at risk for meager returns.
And most importantly, these people are mobile, they're wealth is even more so.
Think "The Rolling Stones" back in the day.
They can just sit on the sideline, use up a little savings, clip some coupons, and wait for the whole thing to crumble from it's own weight.
This will happen when the high earners start wondering why they're going to work and busting their posterior for someone else's benefit, come up with no good reason, and go on vacation.
Government will have to look further down the food chain.
You've already heard the hue and cry from the government types when someone thought they might like to tax sponsored health insurance.
The big lie is that people need and want all the services government wants to provide.
the truth is that people want these services only if someone else is paying.
When people have to pay themselves, not so much.
So Plan C shows govt employees are not totally ignorant and they do know that CRE is the next economic implosion to add to our depression like economic death spiral. And yet no one in congress or admin seem to want to acknowledge these things, nor do they seem to want to deal with them forthrightly. Lame.
I get that panic itself can sometimes be the enemy, but let's grow up, face this in a calm, fearless but fully informed and engaged manner, and once having done that, start figuring solutions. If our govt can't do that, we must make it happen, because, who else will if we don't?
So here it is: as this article provides more evidence, we are in downward spiral of deflating assets, diminishing appetite for risk, de-leveraging, and dropping confidence that sure looks depression-like. "Wealth" in the form of housing, CRE, stock and derivative is going, gone, poof.
While we disagree about what role govt can have in slowing this and providing a safety net, I think 99 percent of commenters and readers do agree govt giving money created by taxpayer debt to banks who then keep it to themselves to stay alive (capitallize)and pay exorbitant bonuses, dividends, and achieve stock appreciation, is just plain wrong and must stop.
Also, we can see that despite all cash coming from Bernake's helicopter, he can't stop the inevitable crashing of a bubble, he can just make it a more expensive, slowly deflating bubble, ala Japan. I think the referenced Plan C is no doubt more of the same, lets just say no to that. Such efforts have proven not to work by a great real world 20 yr expirement by Japan who now has horrible debts to GDP and last 2 yrs of US govt attempts to fix economy. Shifting fake wealth of private credit that is imploding to fake wealth of govt debt is wrong and just plain does not work, face the real world facts.
So lets put aside bickering amongst ourselves about ideologies or who messed this up for just a few moments (both parties, US and other countries across the globe, and the general herding behavior of people towards looser rules, more risk in good times and opposite in bad times did this).
…And let's consider how best we can deal with this inevitable crash going forward.
1) Let businesses that do not have a remote chance of being profitable, fail. Let private wealth that is being wiped out by deflation be wiped out. If housing is too expensive for regular people to buy or rent with their now diminshed income and tighter loan standards, it will become affordable, left alone. Must regular people have already lost their housing wealth, so decreased value of houses just hurts ,mostly mortgage holders. Let it crash to affordable, sustainable prices. Even those with paid for houses that lose value will be fine, as anything they want to move to will be way cheaper, and all other products they want to buy will be cheaper also due to deflation.
2)Where bsuinesses have products or services that can still be viable even in a downsized economy, but just lack short or long-term credit to actualize their reasonable business plans, lets make sure they can get credit under tight, but rational terms in an efficient manner.
Giving bailouts to Citi, GS and BAC is not the way to do this.
I suspect it would not be difficult to get fresh banks, created from the ashes/infrastructure of bankrupted banks to do this. Once crash has occurred, and we find new "normal" of downside economy, people still must still eat and people will still work to get food grown by others. So there are things to be produced and money to be exchanged. If we wipe out bank stockowners, bad real estate deals, inflated asset wealth, and start fresh and clean with a old banks IT system, branches and army of accountants. Once they don't need money to fill such debt holes, they can lend, eventhough they will be more risk adverse.
3)Provide a social safety net for regular people as economy goes through this drastic, but now quick, shift/crisis. This is the one we could all argue about forever, but I say its just a matter of degree which we can easily come to terms on. Important point it aid goes directly to people, only while in crisis, no funneling through rich people and businesses. Unemployment insurance payments being an example.
I say we let everythign crash to make the free marketers and populists happy (no govt interference in markets neither in the form propping them up or welfare to corporations) but still provide some cushion and safety net to individuals to make liberals happy. And then we can move on with our economy. Once excess debt is cleared, asset prices stabilize, bottom is found, then people will start risking, a bit, again. People will buy, now very cheap houses, or sell and move up. Banks will make loans, as they will not fear business will get worse or assets will plummet. And on we go, with a healthy, but smaller economy.
Supply and Demand are the underlying weaknesses in the commercial market. Supply and Demand can't be created or bailed out when we babyboomers have enough stuff. We are downsizing and the market has to adjust to it.
It's a shame not to admit that there is no solution to our "pollution of debt" we have inherited and future willed to our American people. Unfortunately, as the story goes;"…all the kings horses and all the kings men, couldn't put humpty-dumpty back together again". A sad but true way to describe what was once a great nation.
Its time to start taxing people based on wealth (meaning how much they HAVE) vs how much they make. Its ridiculous that a young doctor with student loans pays more in taxes than a Wall St. Billionare who took the year off from work. Taxing the wealthy should mean.. taxing the wealthy, not those who are working their tails off and could have been wealthy if not for outrageous taxes. Bill Gates pays hardly any taxes relative to his net worth. Perhaps if he spent 8 billion a year of his own wealth for health care on illegal immigrants, he would probably see things a lot differently.
Unless commercial property markets can be stabilised you might not have an economic recovery and if you don't have an economic recovery you might not have a job to pay taxes. So I would suggest you worry less about tax dollars and worry more about whether we really do have an economic recovery.
We have several things wrong in this country. 1)Institutions have been allowed to become too large-hence the "too big to fail" problem. 2)The big banks were given the bailout money without strict guidelines i.e. you must loan the money to credit-worthy customers under reasonable guidelines. 3)A knee-jerk reaction by lenders in the mortgage industry that has swung the pendulum-guidelines too far back the other way. Now credit-worthy folks cannot get a reasonably priced loan.
Capitalism has not failed. Our governement has failed miserably and our society has failed. Our gov't is irresponsible with money and ENCOURAGES others to do the same. Where is the admonition of thrift? They tax your savings and encourage you to borrow & spend. We've gone from the biggest creditor to the largest debtor nation. We elected our first black pres and hailed the progress….Surprise! Now we're ALL economic slaves and they are determined to enslave us for generations to come with all the debt. Let the greedy, overleveraged fail and vote in a more responsible congress.
It is a crazy upside down world.
On one hand you have Capitalists happily accepting socialized government money to bail them out.
On the other hand you have Socialists screaming that big monopolistic banks should have been allowed to fail.
I say the problem is campaign contributions that have allowed corporations to unduly influence politicians. This has led to bad policies and regulations that have destroyed the "free" market and severely limited healthy competition. It also allowed these corporations to get too big through approving mergers and acquisitions that should never have been approved.
Like the USSR version of "Communism" (which was really just dictatorial fascism) the US version of "Capitalism" is a failure for much the same reasons. GREED!!! The only reasonable form of government is one in which there is strict regulation of commerce.. The "open market" is just a lie to enable big business to gobble up competition, monopolize an industry and screw the public. All those who are so afraid of the work "socialism" should get out their dictionaries and encyclopaedias and start educating themselves. Socialism (as it is done in western Europe) is the ONLY type of government that is fair to the people, who by the way and in case you haven't noticed can REVOLT and throw out a government that doesn't protect them. The US is supposed to be government of for and BY the people. Let's kick these mega-corps in the balls and put government to work for US instead of for the rich a-holes.
Jensen brings out an excellent point and it is one Congress seems to have just looked over. After giving these financial institutions all the bailout money, they did exactly opposite of what the bailout was about. Instead of making loans available they shut the door and just paid themselves. Now they want to quickly exit the TARP program and are demanding the gov't discount the pricing on the warrants which the Treasury happily is doing. I wish I can easily discount my debt and just tell the banks to pay themselves the different on the money they will be making on the discounted warrants.
The gov't should negotiate hard and offer no discounts on the warrants. This will put the gov't in an excellent position to take care of America's debt. NO discounts on warrants. They financial institutions don't deserve it and the ones who got the discounts offered the public nothing back for our generosity.
So much for these banks rosy earnings reports. Looks like we need to get ready for the second round of bank bailouts. Should of let the market take out the weak ones from the beginning.
That would be impossible with all of the financial industry lobby money being poured into the politicians campaign coffers. Or should I say our tax dollars being recycled. Look for billions more to be stolen from us and given to these idiots. What a joke.
As for T.Winslow in Las Vegas trickle down was what the Democrats used to describe the Republican's economy. Right now it is "waterfall up". Your tax dollars flowing into Washington while getting nothing in return.
We can't ALL work for the U.S. government. You have it all BACKWARDS. It's ALL about jobs. J-O-B-S! Real jobs — the kinds to make things and do things — come from the private sector, not government. Jobs come from individuals who have big ideas and are willing to take risk. They hire others to make things. It's jobs that makes everything else work — creating income and wealth — and paying taxes to pay for the military, welfare and safety of our country. Govenment doesn't make anything. It just redistributes. Don't believe that govenment will "take care of you." TAKE CARE OF YOURSELF! A "big business" is a small business that was successful. Businesses are what makes the world go round. Business owners (and our military) are the REAL heros.
Capitalism hasn't failed, politics in America has failed. The banks should have been allowed to fail – not be bailed out by the Fed. But then how would politicians step through the revolving door into that wasteland??? They couldn't, so they had to try to feather their future beds by taking money from current and future taxpayers to cover up business failures. Sorry Jensen, but the solution isn't for Americans to roll over and allow socialism – it's to rage against the political system and insist their congresspeople do what's right for the country – not what's right for politicians and failed businessmen. Mises, not Keynes. Leaders like Ron Paul, not equally-disgusting repubs or dems. Rage through letters, phone calls, Tea Parties, and votes!!!
This is not a failure of the Free Market, this is a failure of the Government Managed Free Market that we have had since 1913 and the Unconstitutional Federal Reserve Act. Before central banks the US had a few small panics but zero depressions or recessions. We had a stable economic system which inspired innovation. Now we have government approved monopolies funded through incentives and then bailed out when they fail.
There is an important number missing in this article. If there is $3.5 trillion in debt outstanding, what is the current value of the real estate backing that? If it's $2 trillion then we have a huge problem on our hands as the banks will have to absorb these losses. If it's $5 trillion, it's essentially irrelevant as the properties will be foreclosed on and sold to cover the loans. While 100% financing was common for homes, this is not as typical for commercial properties. Furthermore only about half of the value is in commercial banks which typically hold higher level of debt meaning they have first call on the proceeds of foreclosures. Without reporting the asset value backing the loans and some background on the structure of the debt, this article is meaningless fearmongering as losses may ultimately fall on private investors, not commercial banks. The result will be pain to those investors, but not further systemic risks to the economy.
This is unrelated to this report. For taxing wealthy for health care, here is a new word that you all will hear for the very first time:
wHeatth
Jensen, You need a reality check. Government doesn't pay for anything. Where do you think they get their money? Private enterprise a failure? What is your alternative? Grow up and stop with the class warfare, it's rather tiresome after the last election!
Failure of American Capitalism…are you nuts? There are tons of guys like me that are still willing to work like animals to get ahead…we are better than people like you in everything we do.
Yes lots of things failed, that is due to a lot of big egos thinking they were infallable…obviously they weren't as smart as they thought they were.
Companies and industries run by overeducated egomaniacs deserve to crumble and in the process some will be hurt…guess you shouldn't have been that close to the action.
Anyone who got hurt in this deserved it. Period
To condem capitalism because greedy consumers threw their values out the window and believed what greedy sales people had to sell them…thats dumb.
I thought all you liberal guys believed in darwinism and survival of the fittest?
Kind of funny that it is your liberal ideas (all of Wall Street) that failed.
If thats not ironic nothing is….
See ya in the fields fellas…
signed,
A humble farm boy with gold, guns and land.
Outlaw, yes, I said OUTLAW over the counter derivaties. A financial instrument that does not appear on a company's books until it turns into a bad asset, has got be stopped.
Do the same with naked short selling, outlaw it, you should not be allowed to short something you don't own.
Once these two are out of the financial system, the whole thing becomes more apparent, honest and transparent.
If CMOs did not exist and credit default swaps were not allowed, there would neve have been any crisis, becuase the lending practices of 120% LTV loans would have never been possible.
We would not have had the big economic boom of 2005-2008, but we would also not be in the bust we are in today.
Jensen,
Couldn't agree with you more. Years and years of Ivy League educations and what do we have? Crooked bankers, protected by crooked lawyers. Liars and thieves the whole bunch, which includes all the hot air balloons in our Congress. Spent my free time for the last two years working in a barn on a farm refinishing an old wooden runabout. I experienced more honesty, devotion to a work ethic, care for family, and a willingness to help his fellow man from the owner of that farm than has been shown to the entire American population by corporations and Congress since before WWI. Throw the thieves in prison, and put the rest of the liars out on their ears, an NOT another penny of taxpayer money.
Private enterprise is not a failure. The private banking system is. Central banking is a public utility and should be run by a real government entity beholden to taxpayers instead of Wall Street, not a private Fed with government in it's pocket.
With a strong government run central banking sytsem we could have just let these losers fail as they did and should have been allowed to. Bailout monies could have capitalized hundreds of smaller regional banks with billions each to step up. Too big to fail is too big to allow to exist. Banks and Corporations. Where the hell are the anti-trust regulators?
If you have ever been in a Post Office line or in a Social Security Office you don't want the Government running anything. People who don't understand market forces should leave them well enough alone.
What any so called "Plan C" should be (but is not) is what "Plan A" should have been, but was not.
That is a focus on actual production. I do not see what all this bail out money is going to do to create any kind of real economy.
Even if banks were to go back to the lending pace they were at pre-melt down, (That was a bad thing though, no?) how is it going to create jobs? Building more houses we don't need? Opening new eateries and retail stores that we are going to pay for with what? More borrowed money?
Perhaps they should change the tax structure away from favoring borrowing (i.e. interest tax deductions) and toward production of goods (reduce taxes on American labor).
Oh, but that is a silly idea. I keep forgetting, taxing labor means the rich pay more taxes.
Not the working class.
This is what happens when our Soviet-style central planners-er bank pumps billions of dollars of newly printed money into the economy, generating bubbles like no tomorrow. This is not a failure of free-market capitalism. It is a failure of goverment intervention.
Just call the current depression what it is – the failure of modern American capitalism and the onset of American socialism. Let's just cut out the middle men and do away with private banks. They won't lend, but they will take bailout money and pay handsome bonuses to the boobs that brought us this economy. Get rid of them all – each and every last one of them – acknowledge that private enterprise is a failure, and have the government run everything. Right now it is paying for everything, private enterprise isn't reviving the economy, so let's just toss it out and let it fail on its own and start anew (without the ridiculuous compensation structures that are albatrosses around all of our necks as taxpayers).
"Get your taxpayer dollars ready for plan C"? What taxpayer dollars? I already don't have a job, as do many more, and the trickle down effect is not even close to being seen yet.
I for one am preparing to leave my environment and head to a region I can survive in.
Typo in paragraph that is third from the end. Should be "$1.8 Trillion of that tidy sum …" not "Billion"
You're correct. We fixed.
– Editor
Este es un Articulo muy bien ubicado en tiempo; es preocupante lo q viene pasando en real estate comercial; Soy Realtor en Florida y se por experiencia que hay buenos mortgage brokers, no es la culpa de ellos; pero ….. El mercado no comercial en florida esta moviendose hay una fuerte demanda; pienso que hay una luz al final; pero solo para las personas que son profesionales en el negocio; ley de seleccion natural