Commercial Market - Players Getting Nervous
Noah's piece yesterday titled, "Credit / Downgrades / Commercial" talks about the shutdown of the commercial CMBS market and predictions of a decline in commercial real estate prices. Up until now the commercial construction market has been very strong and commercial construction has done much to pick up slack from the implosion in residential construction.
According to an August 13th Wall Street Journal article commercial construction was growing at a 17% year-to-year rate over the summer and was cushioning the effects of the residential construction slump. However, the tightening of credit seems like it could very well throw cold water on this trend.
According to Bloomberg.com :
U.S. commercial real estate prices may fall as much as 15 percent over the next year in the broadest decline since the 2001 recession as rising borrowing costs force property owners to accept less or postpone sales.And Calculated Risk discussed yesterday how Countrywide's Commercial real estate loan pipeline is down significantly; check out this chart:
The chart says it all. I have been attending a weekly real estate seminar in Manhattan for the last few weeks with my partner. Many of the city's biggest and best developers come to speak on various sub-markets around town and segments from retail to multi-family rentals. For the first few weeks the panels started out very ebullient. Each developer in turn waxed poetic about the subject of the day be it prospects for downtown or Coney Island developments, or $2,000 per square foot CondoTel prices, "Main Street" retail rents of $350 per square foot or $100++ per square foot office rents. Somewhere towards the end of the talk, the very talented moderator would finally ask the tough questions about financing, end buyer/user demand for product, absorption rates etc. My partner would comment to me that the panel would visibly slump when the discussion reached these topics and the ebullience would immediately cease. Still people spoke of potential eventual downturns, etc.
Last week the discussion, which was about one of the boroughs, started similarly but quickly got to the tough questions. This time a prominent New York City developer (names withheld to protect the innocent) launched into a monologue about New York's real estate cycles and how long it has been since a downturn. This gray beard averred that cycles had not been revoked and that we were heading into a downturn. He added that this particular borough had way too much new condo supply coming on and was headed for trouble.
Fast forward to this week. The tough questions came right away. One portfolio lender....a banker who makes loans that his bank will hold until maturity.....meaning that unlike Wall Street who packages loans and sells them off....this guy has to eat what he kills. His bank has to live with the loans they make until they are paid back. He also opined that they have gotten much more active as other sources of funds have all but dried up and they are getting rational terms that they were not able to get in prior years in many segments of the market. This had caused them to pull back significantly from New York City lending in recent years. Additionally, he came straight out and said he expected a recession and falling rents in New York City and was underwriting with this in mind. The moderator then ticked off a list of expected additional Wall Street layoffs to be announced soon. The rest of the panel pretty much all capitulated right away and said layoffs were indeed coming, would impact the city's economy negatively and they were worried about the slowdown. It was like a group confessional. To a man/woman they believed that although not many commercial properties had traded recently, cap rates (Net Operating Income/Property Price) had already increased as much as 50 basis points equating to a 10 - 15% correction in price. With costs continuing to increase, this could certainly curtail the booming pace of new commercial construction. A cooling of the commercial construction markets now, while occupancy rates are still very high for apartments, retail and commercial properties in New York could mean a pause that refreshes rather than a big digger, especially if the nation as a whole undergoes only a modest slowdown.
Posted by Justin
Wed Nov 14th, 2007 01:51 PM
The stock markets have bottomed (the markets have decided nobody big is actually going to go broke and therefore everything is under-priced). Mortgage applications are rising, rates are settling back. Gold has ceased to rise and Oil is going down. Copper prices are falling. News on CRE like this is just the tail of the gloom that was really over-sold to everyone. Markets are sound, the fed knows what it is doing, walmart can make a profit out of consumers, the home equity piggy bank is far from empty, emerging markets are offsetting any write-offs by banks like HSBC, and goldman is having a banner year & going for nothing less than the GDP belonging to other countries. Citibank and e-trade are being unfairly under-valued by the market. CDOs and structured finance are here to stay, Irish builders are saving NYC condos, and europeans think NYC is cheap.
Did I cover everything correctly here?
Posted by Noah
Wed Nov 14th, 2007 02:17 PM
I have a number of problems with this statements, but they are of course my opinions.
1. stock markets have bottomed - how can you be so sure? That would mean there will be no future surprises in creditville, no consumer impact from housing slump and declining MEW/home equity, no impact of future inflation pressures. All 3 are tough to handle ideas for me.
2. rates are settling back - yea but considering how far 10YR Bond yields fell and 75 basis pts of fed easing, its not that much! Plus, weaker credit borrowers do NOT enjoy those low rates, not anymore.
3. Gold has ceased to rise and Oil is going down - wow, I just disagree with this totally. It looks like the fed will have to cut more down the road. Expect commodities to rise further if he does.
4. goldman is having a banner year - Hmmm..The very smart people at Goldman are SHORT THE SUBPRIME MORTGAGE MESS & OTHER MBS! yea, thats a real bullish sign from the very smart people at Goldman!
5. Irish builders are saving NYC condos - they did most of their buying already! The weak US dollar is nothing new and has been named as a peice of the puzzle here for supporting our market for past 12-18 months! hasnt changed. Only thing thats changed is credit crunch and dip in confidence. Blind to think that is not effecting foreigners mindsets. plus, what happens when these foreigners close on their properties? Are any going to sell or everyone just holds and uses it as second home?
Some of the other stuff you mentioned Ill buy into!
Posted by WW
Wed Nov 14th, 2007 04:51 PM
Noah, I think Justin forgot the /sarcasm.
When the Irish came into play, that was clear to me.
However: ...could mean a pause that refreshes rather than a big digger....
I dont really believe that there will be refreshments served, unemployment, sinking city budget will have a multiplier effect.
But very interesting to read some inside views!! Hard to find anything about NYC RE in that direction.More!
Posted by Noah
Wed Nov 14th, 2007 05:08 PM
lol...you know, like 3 min after I wrote the response, Im like...oops. my brain is fried. need a break!
dont worry, more to come...
Posted by uwsider
Wed Nov 14th, 2007 05:42 PM
This info is great, I like to get my info from non-sugar coated bias sources and this is very helpful in seeing what may lie ahead
Posted by Jeff
Wed Nov 14th, 2007 06:44 PM
Justin I think you pretty much captured the bull case...and I for one think that's just what it is. My favorite part is the how foreign investors will bail out NYC. Foreign investors are notoriously late to the market. Remember how they bought up all the investment banks and fund managers in 1999 and 2000. Yet you still keep hearing about the positives of a weaker dollar. As my piece on the 1987 crash in the Spring noted - foreign governments are already diversifying away from US govvies. I asked the panel which had some guys who represent Irish and Kuwaiti money about how weak a dollar their investors are ok with. No answer - "They are long-term investors". If you buy real estate today that looks cheap due to a cheap dollar, how does it look if the dollar gets 15% cheaper and stays there for 10 years??? STILL CHEAP. I don't know that this scenario will or can happen....but there will be a time when people worry about it...and they aren't worried enough yet. I actually think the cheap dollar will be a positive for manufacturers-based in the U.S., guys that have managed to survive on our shores this long will get some much needed relief from foreign competition - that we can be happy about.
Posted by Justin
Wed Nov 14th, 2007 10:27 PM
I should have made it a tad more sarcastic, sorry Noah. & I take back the part about gold. It turned out to merely be "consolidation" or "the pause that refreshes", now it appears to have resumed the long trudge to $1000 perhaps helped by the news after the bell that GE is closing one of those "safe n sound can't lose your principal" money market funds - at 94 cents on the dollar.
As for irish (or euro-riche) saving the property market I don't believe that for a second, nyc may be cheap in pounds but after the brave pioneers report the bath they are taking on maintenance while failing to command the high rentals dreamed of @ contract close, the next wave of guinness fans may think twice about that 30th floor studio apartment. The other imported euro-wallet, or at least a LARGE slice of them, come at the behest of relocation consultants and high-paying finance jobs. Is Goldman going to save the day there as well?