S&P Warns of Coming CRE Bust

Posted by urbandigs

Tue Apr 7th, 2009 09:41 AM

A: And the dance continues. Remember, its not just a subprime problem but an overall debt problem covering commercial MBS, HELOCS, credit cards, auto loans, option arms, cosi/cofi neg am loans, alt-a, prime, jumbo prime, lbo's, etc..As Mike Mayo mentioned yesterday, as one area of the banks balance sheet is cleansed, another seems to deteriorate faster reflecting a 'rolling recession by asset class'.

Via Housingwire.com, "S&P Warns on CMBS; CRE Bust Here?":

Standard & Poor’s Ratings Services warned Tuesday morning of a coming slide in commercial mortgage-backed securities, as the economic recession appears set to take a bite out of one of the few remaining real estate asset classes to survive much of the turmoil in financial markets worldwide.

“Since September/October 2008, Standard & Poor’s has witnessed significant deterioration in the credit performance of the CMBS transactions it rates,” said credit analyst James Manzi. “The economic recession combined with the absence of readily accessible financing in the capital markets has, in our opinion, skewed the credit risks related to the performance of CMBS sharply to the downside, and in excess of what we expected at origination or in our prior scenario analysis.”

“Recent-vintage CMBS fared the worst in the analysis, with the 2005-2007 vintages posting PLLS in the double digits,” said Harris Trifon, a credit analyst with S&P.
Reality sets in. Only last week did we witness the John Hancock Tower in Boston foreclose and sell at auction for a 65% haircut -
MISH - "...This property sold for $1.3 billion in 2006 and $935 million in 2003. Today's price is $660 million, a 50% haircut. But that's only part of the story. A friend writes "Don't forget the value of the financing that Normandy now gets to assume: $640 million mortgage at a rate of 5.6%. Thus the real price the Hancock sold at foreclosure is more like $470 million not $660 million. That is a 65% haircut in three years."
Calculated Risk discussed the plunging MIT CRE Price Index early in February:
Transaction sale prices of commercial property sold by major institutional investors fell by more than 10 percent -- a record -- in the fourth quarter of 2008, according to an index developed and published at the MIT Center for Real Estate that also posted a record 15 percent drop for the year.

The 10.6 percent drop in the transactions-based index (TBI) for the fourth quarter is the largest quarterly decline in the gauge's history, which dates to 1984. The previous record was a 9 percent drop in the fourth quarter of 1987. The 15 percent fall in 2008 is also a record, topping the 10 percent and 9 percent declines in 1992 and 1991, respectively.
CR follows, "The price declines will impact property owners who are now underwater and can't refinance, and also impact banks and other investors in CMBS who will experience see higher default rates. The coming decline in non-residential investment will impact GDP and construction employment, but that decline will probably not be as severe as after the S&L related boom."

Richard Parkus, head of CMBS research for Deutsch Bank, released his 2009 Commercial RE Outlook and offers us this doozy of a chart showing aggregate CMBS delinquency rates visualizing the performace of this sector:

cmbs-performance.jpg

Tidbits:

  • Deterioration accelerating sharply since September 2008


  • 30-day and 60-day delinquency rates up 300-400% in six months


  • Expect aggregate delinquency rate will be in excess of 3.5% by end of 2009, and 5-6% by late 2010


    • So lets see here: prime is starting to deteriorate faster than subprime, Jumbo prime faces $241 Billion of downgrades, lawyers are reporting of CRE deals falling apart mid-stride, office rents are falling and vacancies are rising, delinquency rates on more than $700Bln of securitized loans backed by office buildings/hotels/stores/other more than doubled since Sept 2008, and now S&P warns of the worse-than-expected credit deterioration of CMBS. Well, at least Jim Cramer said the depression is over, so, look away, nothing to see here!!

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