Tuesday, October 20, 2009

Commercial Real Estate Fiasco

Bloomberg details the fiasco that is the commercial real estate market:

Commercial property values in the U.S. declined in August as job losses and the recession cut demand for offices, retail space and rental apartments.

The Moody’s/REAL Commercial Property Price Indices fell 3 percent in August from July, bringing the market’s decline to almost 41 percent since its peak in October 2007, Moody’s Investors Service said in a statement today. Prices fell 8 percent in both April and May, according to Moody’s.
The Why (i.e. the double whammy of too much supply from the bubble and no demand):
Values are falling as U.S. unemployment climbs and consumers cut spending. Office vacancies rose to a five-year high of 16.5 percent in the third quarter, according to New York-based property research firm Reis Inc. Apartment vacancies hit a 23-year high and mall vacancies were the highest since 1992.
The optimist point of view:
“We can’t call a bottom at this point, but it’s an encouraging sign to see the deceleration in the decline,” said Connie Petruzziello, a Moody’s analyst and co-author of the commercial property price report.
The realist point of view:
Commercial real estate prices are forecast to fall additional 17 percent through the fourth quarter of next year, Goldman Sachs Group Inc. said in a Sept. 30 report, citing scarce credit, rising vacancy rates and the risk of forced sales.
The ugly chart through August 2009:

The real fear is what will happen when those properties financed in 2005-2006 need refinancing (a lot of these properties were financed on 5 year'ish loans) and owners realize the asset they have is worth 40-50% less than they paid for it, but still need a loan for that full amount. But, the problems are happening earlier as those same owners are wondering why they should make payments with that type of future (or in many cases can't make payments now).
Late payments on commercial mortgages jumped sevenfold in September from a year earlier, as installments on $22.4 billion of mortgages were at least 60 days late, Credit Suisse analysts reported Oct. 12. The delinquency rate of commercial mortgage payments bundled into bonds rose to 3.64 percent in September from 0.54 a year earlier, Moody’s said Oct. 13.
Source: MIT


  1. Jake,

    It's very hard to inflate in the face of a supply glut. Add in slack demand and I'm not even sure $1.5 trillion in new Federal Reserve credit can do the trick.

    My forecast is for the mother of all Federal Reserve balance sheets. That said, I still don't see high inflation, at least for a few years.

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  3. Hi. Yes, I must say that I'm very skeptical about the future economical development as it seems that the housing "bubble" which triggered the economical crisis won't be the last one, quite the opposite, I'm afraid there will be more to be expected. The problem is that the whole country is in debt and people have loans, but there won't be enough money to pay for them.
    Take care,

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