caseyresearch.com
And Commercial Real Estate Is Really, Really Sad
While off the core topic of the summit, commercial real estate entrepreneur Andy Miller gave a factual, well-reasoned, and alarming speech on the insurmountable problems facing commercial real estate. And, by extension, the banks, insurance companies, and pension funds whose portfolios are loaded to the gills with commercial real estate loans.
I could go on for many pages on this topic (a topic we discuss at length in The Casey Report), but will provide just one snippet that helps make the point.
Most commercial real estate is now deeply underwater and has just about zero hope for a turnaround at any time in the foreseeable future. Yet the banks are not foreclosing, because they don’t want to have to write off the losses.
The sponsors of the big commercial real estate projects – condo units, shopping centers, warehouses, office space, manufacturing facilities, hotels, etc., -- being fully aware they are already dialed into big losses, have stopped maintaining their buildings.
Andy used the example of a condominium project that badly needs the roofs replaced at a cost of $600,000. Because the repairs will only deepen their losses, the owners aren’t replacing the roofs. As a consequence, the buildings are beginning to suffer structural damage from the leaking roofs, including mold, that threatens to literally ruin the buildings.
So when the banks finally do foreclose on the buildings, they’ll be inheriting nothing but huge problems – requiring expensive repairs or even a total-write off, as the buildings will need to be torn down. This situation, according to Andy (and he looks at big portfolios of commercial buildings around the nation), is endemic.
The problems associated with the multi-trillion-dollar commercial loan market are a tsunami headed for the American economy, a fast-moving wave that threatens to wipe away any thoughts of green shoots in the first or second quarter of next year. Don’t be lulled by the sweet talkers on Wall Street or their buddies in Washington as to what’s coming.
Yesterday, Andy sent me a follow-up note and link to an article on commercial real estate that he thought readers would find timely and relevant, given his speech. You can read it here.
cnbc.com
Commercial Real Estate Is Next Bubble to Burst: Tishman
Published: Monday, 21 Sep 2009 | 4:10 PM ET
Commercial real estate is the "second shoe" to drop in hurting the economy, Daniel Tishman, chairman and CEO of the Tishman Construction Corporation told CNBC.
"We're getting through the single housing real estate market OK but the numbers involved in commercial real estate in all sectors are staggering," Tishman said. "Trillions of dollars are involved in commercial loans. The roll over of those loans in the next 5-7 years is going to happen and the money just isn't there for refinancing."
Tishman, whose company is one of the oldest construction firms in the US, said the industry needs government help.
"The TALF (Trouble Asset Loan Facility) program is about to end and it needs to be extended," Tishman said. "The government needs to come up with some creative programs to help out the industry."
Tishman said there's a total amount of $3.4 trillion in commercial loans that needs refinancing, and many local banks are holding those loans.
"I think they (banks) are very exposed," said Tishman. "There are huge numbers of banks that could have problems (and face closings) going forward because of carrying these commercial loans."
Tishman said REITs, or real estate investment trusts, are not in as much trouble.
"Most of the current REITs are doing well," said Tishman. "They own a lot of the commercial loans but they have the ability to raise money. That will help them defer any losses."
Tishman said the commercial real estate bubble was created by an over-eagerness of lending.
"One property being acquired and then being lent on and lent, created this," said Tishman. "Multiple levels of returns were required and that caused the problem. I don't see values for commercial real estate coming back for two to three years." |
