>>>Morgan Stanley alone could see 45 per cent of its commercial portfolio value wiped out<<<
So glad to see the financials providing another great opportunity to enter on the dark side. Sold a few FITB $9 calls this AM. How heavily did Geithner weigh CRE in the stress tests???
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Next shoe to drop? The other real estate market
May 9, 2009 at 6:00 AM EDT
So it turns out that after sucking in billions upon billions of public dollars, the U.S. banking system is more or less a going concern. At least that's the upbeat verdict pronounced by U.S. regulators after putting the 19 biggest banks through their much-ballyhooed stress tests.
Sure, 10 need to raise another $74.6-billion (U.S.) combined in extra capital to weather what Washington regards as the most foul of economic storms. But that's small change for this bunch, provided markets don't suddenly lose their new confidence that the worst of the banks' woes are behind them.
Skeptical analysts, including the redoubtable Nouriel Roubini, point out that the actual data for economic growth, unemployment and housing prices – the three stress-test variables – are already worse than the assumptions used in framing a worst-case scenario for the banks. Nevertheless, the better-than-feared assessment was enough to bring joy to investors everywhere. Gee, big Ohio lender Fifth Third Bancorp only has to come up with another $1.1-billion (on top of the $3.4-billion in bailout money already pocketed). No wonder its stock price jumped more than 50 per cent.
We mention Fifth Third because it's one of five big regional banks that list commercial real estate as their single biggest source of potential losses.
Fifth Third and the other regionals are not alone.
GMAC, which foolishly jumped into real estate lending as a hedge against car loan losses, stands to lose a bundle. And so does Wall Street survivor Morgan Stanley, which rushed to take advantage of renewed investor interest in financials by tapping the debt and equity markets for about $8-billion Friday.
Celebrated analyst Meredith Whitney recently told me that commercial real estate would be the next big black hole for the U.S. banks. And it's easy to see why after a chat with Karl Case, an economics professor and co-developer of the influential Case-Shiller index, which tracks changes in home prices in all the key U.S. markets. Regulators used Case-Shiller in their stress tests.
The U.S. housing sector, whose rejuvenation is crucial to a broader economic recovery, may finally be turning the corner, Prof. Case says. But commercial property is another matter entirely.
True, it's a far smaller asset class than residential housing, and its deterioration isn't going to matter as much as falling home prices, which have had a cataclysmic effect on family balance sheets.
But it would be a mistake to underestimate the damage it can inflict on already battered bank finances.
Morgan Stanley alone could see 45 per cent of its commercial portfolio value wiped out and GMAC more than a third, according to official worst-case estimates.
“It's nasty, ‘cause you can see it coming like a railway train,” Prof. Case was saying the other day, as he walked me through the math.
As a guiding rule, every person laid off results in 180 square feet of vacant commercial space. “So if you lay off 600,000 [a month], you can just do the arithmetic. There's a lot of vacant space coming on line. Some of it's still leased up. But the vacancy rate is certainly going to rise, rents are going to fall and cap [capitalization] rates are going to rise.”
That deadly combination can rapidly bring down the value of a building by 60, 70 or even 80 per cent, leaving the mortgage lenders in the lurch. “The banks don't have patience with that stuff being on their books leveraged.”
His partner in indexes, Robert Shiller, a Yale economics professor and best-selling author, enjoys a higher profile. But Prof. Case, who has plied his craft at Wellesley College in Massachusetts for more than three decades, is equally renowned for his incisive analytical skills. Both were early in predicting the housing bust, as might be expected of two of the world's leading experts in the field.
Today, Prof. Case sees the first faint signs of a bottom in the housing market, although this is not yet reflected in his index.
“There's a lot of anecdotal evidence that people are showing up at open houses. Properties are trading in higher numbers. I could be wrong, but I listen to the street, and the street's talkin' a little bit now.” |
