S&P Warns of Coming CRE Bust
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.Reality sets in. Only last week did we witness the John Hancock Tower in Boston foreclose and sell at auction for a 65% haircut -“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.
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.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."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.
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:
Tidbits:
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!!
Comments (10)
Noah,
http://www.forbes.com/2009/04/03/banking-andy-beal-business-wall-street-beal.html
Just something I thought you and your readers might find interesting. Story on Andy Beal and how he has been operating his bank.
Posted by RegularAnon | April 7, 2009 10:04 AM
Thanks Noah... Based on the Hancock building and 1540 Broadway sales it's inevitable that NYC residential real estate will soon trade at 65% of peak values too.
Posted by Infrequent Poster | April 7, 2009 11:26 AM
RegularAnon - thx for posting. i actually worked for Beal on an FDIC bid back in 2001. the article is dead on. he was very quirky and very smart - quixotic is the term they used in the article i think and very accurate.
Posted by Fred | April 7, 2009 12:18 PM
I think it's going to be an absolute slaughter in CRE, but some of the adjectives in the articles you reference are misplaced. "A doozy of a chart" regarding the 1.8% 30+ day delinquency rate - that's not bad at all. It'll get worse, and probably worse than 5-6% by late 2010. 5-6% delinquencies isn't even bad, really - assuming all of those default and take 50% write-downs, you're looking at loss rates of just 2.5 - 3%. It will be much worse than that.
Further, the John Hancock building story is just twisted every which way to garner a headline. It is not a good data point at the end of the day because the auction winner was not only the single bidder, they had been buying up the mezz position for several months with the obvious goal to control the property. Who would bid against them? They would obviously protect their position and bid rather high, but start extremely low...
S&P has the most aggressive (or would it be conservative?) stance on CMBS losses that I've seen. I think that is great - they are on target. You know Moody's is forecasting around 5% average losses (less than 1/2 S&P's forecast!), and so are most Wall Street banks.
Posted by Dark Space | April 7, 2009 12:45 PM
By the way, this is the same building that I commented on about a week ago, linking to the original version of the Bloomberg article.
:-)
Posted by Thisson | April 7, 2009 5:56 PM
The sad part is that even with default rates of 20%, assuming 0% recoverable, a portfolio of loans selling for 72 cents on the dollar will still not beat out the 10% rates you can get on BBB rated companies with good business models. You're just not getting enough compensation for the added risk. Prices need to come down further. The market knows this.
I'm staring at 15%-16% yields on bonds by REIT companies who don't have unbearable debt loads (HPT, 3x coverage of interest expenses.) Now that is some compensation for risk right there. Those bonds are trading at 57 cents on the dollar. Would I touch them? Probably not but it just highlights the disconnect between bank marks and market marks.
By the way, I liked that article. I've been hearing about him. Wow, what a guy. Wish I was in his shoes: a business that can borrow at rates less than 5% but can buy assets well under par.
Posted by MeekSheep | April 7, 2009 8:32 PM
Ever heard of Chock Full of Nuts?
They were the Dunkin Donuts of the 1970s and early 1980s and had branches in NYC all over the place.
During the stagflationary 70s, the CEO decided to cash out by converitng the company store locations into long term, fixed rate leases w/the option to sub-lease.
The result? Those leases continue to pay out. And Chock Full Of Nuts trades in the supermarket and Hispanic bodegas instead of NYC street corners.
Maybe it's time to do another Chock Full of Nuts operation.....
Posted by In Debt We Trust | April 7, 2009 8:37 PM
MeekSheep-
Take a look at a BBB or single A rated CMBS, which is comparable in a lot of ways to your typical REIT unsecured offering (obviously there are differences, but on the order of <100 bps fundamentally)... The CMBS is trading at a 60+% Yield (single digit price level), compared to the REIT at 15-16% (to use your number).
Posted by Dark Space | April 7, 2009 8:49 PM
Dark Space,
You are right. (Don't hear that often on forums do ya?) I guess what I was trying to say was that if banks are continuing to hold out for 72 cents on the dollar for crap assets but we're seeing large losses on those securities why would an investor with even a small appetite for real estate related debt take a CMBS when he could get a better deal on an unsecured bond with less perceived risk? And if CMBS by your quotes are trading at pennies on the dollar who are they fooling?
I wonder if the John Hancock tower will be the new blue print of hedge funds to come. 97% LTV, 6% interest on that loan, and relatively few bidding wars. Sounds like a nice game plan to me. Lever me up, baby.
Posted by MeekSheep | April 7, 2009 9:51 PM
Darkspace,
What do you corp bond traders think of the vix action here?
Posted by In Debt We Trust | April 8, 2009 2:48 PM