"No Sign of Recovery" in Commercial Real Estate

Calculated Risk details (via Bloomberg):

The Moody’s/REAL Commercial Property Price Index dropped 4.2 percent from February and is now 47 percent below the peak of October 2007, Moody’s said in a statement ...So-called trophy properties in New York, Washington, Boston, Chicago, Los Angeles and San Francisco are helping those markets avoid the drag caused by distressed asset sales nationwide, Moody’s reported.

The overall index shows “no sign of recovery,” Moody’s said.

The Moody's / REAL Commercial Property Index is in nominal terms (despite the "real" name), but still hit a post-bubble low. In real terms? 21% down since the series began back in December 2000 and 50% below August 2007 levels....

Source: MIT / BLS

Commercial Real Estate Collapse Continues

WSJ details:

U.S. commercial real estate prices fell 3.3% in August from a month earlier, putting prices at 2002 levels after a third straight month of declines, Moody's Investors Service said Tuesday.

Prices for office buildings, shopping centers and apartment complexes are now down 45% from their late-2007 peak, said Moody's. Rental demand has diminished, shrinking properties' cash flow, while a tighter financing market has restricted investors' ability to inflate their returns using leverage.

The decline in nominal terms is to 2002 levels. In real terms... we are at pre-index levels.

Source: MIT / BLS

Commercial Real Estate Resumes Decline

After the Moody's/REAL Commercial Property Price Index appeared to be bottoming in January, EconomPic stated:

So have we hit a bottom? For the time being... possibly. But longer term, I am not so sure in nominal terms and even less confident in real terms.

Lets put the current price level in perspective. We have come a LONG way (down 44% from peak to current trough), but price levels are now just slightly below the level seen in January 2001 (in real terms). What's different now than then?

• Less demand (3,000,000 less people employed and office vacancy rates at 18% [up from 8%] in 2001)
• Significantly more supply (anyone have a source for square footage?)
• Less credit available for purchases

Fast forward two months later and it turns out that "long term" may not have been all that long term after all.



Noise? Perhaps. That said, fundamentals still don't appear to be strong.

Source: MIT

Chinese Real Estate Prices Jump Most in 5 Years

Bloomberg details:

China’s property prices rose a record in April, defying government measures to stem gains and suggesting more drastic curbs are needed.

Residential and commercial real-estate prices in 70 cities climbed 12.8 percent from a year earlier, the National Bureau of Statistics said on its website. That topped the 11.7 percent surge in March, which was a record then for the data series that goes back to 2005.

Below is a chart of the national "70 Medium-Large Sized Cities" real estate index, along with China's 5 largest cities showing the widespread jump for new, existing, and the broader index.



And while there are conflicting reports (the Bloomberg article has a quote claiming “the only reason why April posted a gain was the low basis of comparison from last year”), the data seems to show the pace was accelerating. Economic Times with those details:

Property prices rose 1.4 percent from the previous month, higher than the 1.1 percent pace in March and logging the quickest pace since December, when the monthly increase was 1.5 percent.

Moreover, many analysts say the way the index is compiled seriously understates the degree of property inflation. Real estate investment in the first four months increased 36.2 percent compared with the same period last year. Year-to-date investment in the first three months of 2010 was up 35.1 percent.

A chart showing the year over year change vs. the month over month change annualized seems to show an increased appreciation.



China is now apparently ready to do whatever it takes to fight the bubble:

China, trying to peel back the effects of a $586 billion stimulus package and lending binge that drove a surge in home prices, is stepping up efforts to cool the market with policies Deutsche Bank AG described as “draconian.” It ordered developers not to take deposits for sales of uncompleted flats without proper approval, curbed loans for third-home purchases, and on May 2 boosted banks’ minimum reserve requirement for the third time this year.

How much of an impact can this all have? Well, if one were to believe a Business Week article (I believe the direction, not the scale) a LOT.

Beijing News said property prices in the capital slumped more than a third over the past one month.

Housing prices fell 31 percent for the week ending May 9 from the week ending April 11, to average price of 16,898 yuan per square meter, the Beijing News reported today, citing statistics from consulting firm Comprehensive Real Estate Services Corp.

I don't buy 31% in a week, but it shows just how much air is in the bubble if that kind of number seems somewhat reasonable.

Source: National Bureau Statistics of China

Commercial Real Estate Bottoming?

Commercial real estate prices rose for the third straight month, bouncing from an epic collapse, on lower volume (less transactions), but higher dollar volume.

Before we jump into the details, as Calculated Risk notes:

Beware of the "Real" in the title - this index is not inflation adjusted. Moody's CRE price index is a repeat sales index like Case-Shiller - but there are far fewer commercial sales - and that can impact prices.

The below two charts (index level and year over year change), both show what appears to be a bottoming in the commercial real estate market.



Year over Year Change



So have we hit a bottom? For the time being... possibly. But longer term, I am not so sure in nominal terms and even less confident in real terms.

Lets put the current price level in perspective. We have come a LONG way (down 44% from peak to current trough), but price levels are now just slightly below the level seen in January 2001 (in real terms). What's different now than then?

• Less demand (3,000,000 less people employed and office vacancy rates at 18% [up from 8%] in 2001)
  
• Significantly more supply (anyone have a source for square footage?)
• Less credit available for purchases
  

Source: MIT

Commercial Real Estate Price Blip or Bottom?

Even after a 1% jump in the commercial real estate index in November, Calculated Risk details how far prices have fallen:

CRE prices peaked in late 2007 and have fallen 43% from the peak and are now back to September 2002 levels.

September 2002 levels in nominal terms, but pre-index (December 2000) prices in real terms (the REAL in the title is not "real").



With everything going on in the broader economy (i.e. vacancy rates), lack of financing, and new properties still coming to market, I must agree with Calculated Risk that this is just a blip.

Source: MIT

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

Commercial Real Estate: There Goes the (Entire) Bubble

Bloomberg reports:

Commercial real estate values in the U.S. fell 27 percent in the year through June and rents for offices, shops and warehouse space may continue to drop through 2010 as the recession saps jobs and consumer spending.

The Moody’s/REAL Commercial Property Price Indices fell 1 percent in June and are down 36 percent from their October 2007 peak, Moody’s Investors Service said in a report today. A rebound isn’t likely until the second half of next year, the National Association of Realtors forecast in a separate report.

Calculated Risk notes:

Beware of the "Real" in the title - this index is not inflation adjusted - that is the name of the company (an unfortunate choice for a price index). Moody's CRE price index is a repeat sales index like Case-Shiller.

Which of course gave me the idea to show the index in both nominal and real (backing out inflation using CPI) terms.



Talk about full circle... BUT, it is likely far from over. Back to Bloomberg.

Unemployment of 9.4 percent, falling industrial production and a drop in consumer spending curbed property demand, NAR said. Falling rental income and scarce credit are hurting both landlords and investors in securities backed by commercial property loans. Defaults and late payments on commercial mortgage-backed securities may surpass 7 percent by year-end, according to research firm Reis Inc.

“It’s too soon to call the bottom,” said Connie Petruzziello, a Moody’s analyst and co-author of the commercial property price report.

Source: MIT

CRE: I Think the Shoe Just Dropped

The worry that commercial real estate was the "next shoe to drop" goes back a long time, but after this additional data point, I think we're here. How banks and other financial institutions are hiding this level of damage has me scratching my head. Calculated Risk with the details:

From Dow Jones: Moody's: Commercial Real-Estate Prices Fall 7.6% In May

Commercial real-estate prices fell 7.6% in May ... The indexes are down 29% from a year ago and 35% from their October 2007 peak.

According to Moody's, CRE prices fell in 8.6% in April (about 16% in two months).

Talk about cliff diving!

Source: MIT

CRE: TTTIIIIIMMMMMBBBEEEERRRR

Zero Hedge with the details:

Moody's has released its April Moody's/REAL Commercial Property Price Indices (CPPI) update and it is a doozy: -8.6%, after what many had expected was a shooting green reading of just -1.7% in March. The problem that many don't grasp, that even Moody's has finally caught on, is that once capitulation in CRE sets in, the bottom will be torn out.

How low can we go?

Source: MIT

Hotel Struggles

Ugly figures across "classes" of hotels.



I'm surprised with the performance of midscale hotels. I expected between downgrades from those previously going "upscale" on vacations / the business traveler, occupancy would be closer to flat.

I guess nothing should surprise me in this environment.

Source: Hotels Now via Infectious Greed

Commercial Real Estate Troubles

As we've previously detailed here, here, and here, between increased escalating vacancy rates, asset deflation, the leverage used to finance these commercial loans, and the inability to refinance loans in this environment, commercial real estate is on a downward spiral.

This WSJ article marks what may be the beginning of the next stage of the crisis; the failure of two big issues backed by commercial real estate:

The market for debt used to finance hotels, offices and shopping malls tumbled Tuesday on worries that the long-feared rise in defaults for commercial mortgage-backed securities had begun, possibly ushering in the next phase of the financial crisis.

Analysts at Credit Suisse said two big commercial mortgages that had been packaged into securities in the past year were likely to default. The rapid deterioration of these loans fed worries that the weakening economy and higher unemployment rate would drag down the $800 billion market for commercial-mortgage-backed securities, or CMBS, which so far has withstood the credit crisis with low delinquency.

The financing rate for a commercial real estate loan has now more than tripled over the past four years. If rates remain this high, expect more failures and another round or two of bank write-downs.

You Call That a Knife? THIS is a Knife!

You call that market volatility? This is market volatility. Below is a chart for Double Inverse Real Estate (Symbol SRS), which is up another 10 points as of this post.

20 point daily swings have been commonplace and a 60 point move occurred just a few weeks back on October 28th. The following news explains it all in a nutshell (WSJ):

One of the nation's largest shopping mall owners, General Growth made the warning in a quarterly filing with the U.S. Securities and Exchange Commission. The company, based in Chicago, faces an additional $3.07 billion in debt coming due next year.

General Growth has struggled for the past year to refinance and pay down a $27 billion debt load, amassed in acquisition sprees in recent years. The company owns more than 200 U.S. malls, including flagships such as Honolulu's Ala Moana Center and Las Vegas's Fashion Show mall.

General Growth has $900 million in debt coming due Nov. 28 on two luxury malls on the Las Vegas strip. It has another $58 million in bonds due on Dec. 1. The company is attempting to meet those obligations by selling those two malls as well as another on the Las Vegas Strip. It also is negotiating with its lenders to gain an extension on its deadline to pay those debts.

Another victim of an era of easy money. Expect commercial real estate properties to be under immense pressure as they get hit from the bottom (vacancies due to unemployment) and the top (deleveraging).

In other words, expect this volatility to continue for a long time to come...

Commerical Real Estate Charge-Offs

Source: Federal Reserve