Is Commercial Real Estate on the Verge of Crashing? (Graphs)

The delinquent unpaid balances for Commercial Mortgage Backed Securities continues to rise.

The delinquency rate has now risen about 7 percent to 7.87 percent. Above 7 percent can be considered the level where a real crash can take place at any time.

Realization of this dire state of affairs could cause the stock market to take a major tumble. It would also be the point to get long term bullish on the stock market.

Having said this, I would expect a significant drop if this occurs. I would expect this drop to last more than a few days, more likely several weeks, as the market unwinds and fear takes over.

Real Estate Loans at All Commercial Banks (Three Looks, Graph)

When I looked at this chart, I thought no way. This trend cannot be sustained in this environment.




So I decided to take a look from a different perspective. Percent change from a year ago.



Sure enough, this gives a more realistic view of what is going on in the real estate loan market. Notice that the peaks are getting lower. The peak in 2007 should come as no surprise.

The big question? Is lending going to turn negative? And what effect would that have on the economy and stocks? It would scare people to death for sure.

Next I decided to look at the 20 year view?



Hmm. This is really interesting. Look at the long downtrend that started after the stock market crash of 1987. Straight into 1993. I wonder why we didn't need TARP in those days?

No wonder houses were so cheap in the second half of the 90s. In some parts of the country (Florida, Texas) they were giving houses away. And obviously, they weren't building many new houses.

I think its time to buy a house. Looks like a real opportunity to me. Especially if you know how to go into a bank and negotiate for a house that is currently stuck in their roach motel of homes.

I also think you should be careful. It appears to me that the trend down in loans is going to continue for a while. So stay away from the temptation to buy anything associated with housing.

Look for the real opportunities.

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U.S. office vacancy hits 15.9 percent

Tip of the hat to our reader, Trader Kev.

• U.S. office vacancy hits 15.9 percent in Q2U.S.
• office rent falls 2.7 percent in Q2.

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US office market continues to spiral down--report

By Ilaina Jonas

NEW YORK, July 7 (Reuters) - The U.S. office market vacancy rate reached 15.9 percent in the second quarter, its highest in four years and rent fell by the largest amount in more than seven as demand from companies and other office renters remained weak, real estate research firm Reis said Inc.

"It's bad," Reis director of research Victor Calanog said. "It's decaying and getting worse. Given the depth and magnitude of the recession, you can argue that we are facing a storm of epic proportions and we're only at the beginning.

The weak demand helped push up the average weighted U.S. office vacancy rate 0.70 percentage points during the quarter and 2.7 percentage points compared with a year ago, according to the report released on Tuesday.

Asking rent during the quarter fell 1.4 percent to $28.43 per square foot. Factoring in rent-free months and improvement costs to landlords, effective rent -- the net amount of cash landlords take in -- fell 2.7 percent in the quarter to $23.42 per square foot. The second-quarter drop was more severe than the first quarter's 2.3 percent, dampening hopes the office market is bottoming out, Reis said.

Year over year, rent was down 6.7 percent, the largest one- quarter decline since the first quarter 2002.

"This is really only the third quarter that we've experienced negative effective rent growth," Calanog said. "Last time, the office sector had four years of negative effective rent growth."

Although the sector has experienced downturns before, the current one may be lethal for lenders and investors who bought property during the boom years of 2005 from 2007. Many of them based the price and the loan on the belief that rents would continue to post strong growth and occupancy increases.

"It's like taking on a lot of debt as an individual and now suddenly earning 10 percent 20 percent 30 percent less," he said.

The dwindling cash flow resulting from higher vacancy and lower rent weakens the ability to repay financing and pushes a borrower closer to defaulting on a loan.

The weak second-quarter performance prompted Reis to maintain its February forecast calling for the U.S. office vacancy rate to top out at 18.2 percent in 2010 and for rent to continue to fall through 2011. It also sees the commercial real estate default rate to reach 4.2 percent by the end of the year and peak at 5.2 percent in 2011.

The U.S. vacancy rate was at 12.5 percent in the third quarter of 2007, but has since risen 3.4 percentage points, Reis said.

Of the 79 markets that Reis tracks, vacancy rose in 65 and effective rent fell in 72, indicating the weakness is widespread.

Vacancy in the New York area, which includes all the New York City boroughs except Staten Island, rose 1.2 percentage points to 10.8 percent, the highest since 1996, and effective rent slid 5.2 percent

"As far as we can tell for New York, the next two years will be murder," Calanog said.

Boston and Orange County and San Jose California saw rent fall more than 5 percent.

Those results do not bode well for office landlords Brookfield Properties Corp (BPO.TO: Quote, Profile, Research, Stock Buzz), Vornado Realty Trust (VNO.N: Quote, Profile, Research, Stock Buzz), Boston Properties Inc (BXP.N: Quote, Profile, Research, Stock Buzz), SL Green Realty Corp (SLG.N: Quote, Profile, Research, Stock Buzz) and Maguire Properties Inc (MPG.N: Quote, Profile, Research, Stock Buzz).

About 20 million square feet of office space came on the market than was rented during the quarter, slightly less than the 25.2 million square feet in the prior quarter.

Year-to-date, a net of 45.2 million more square feet of space put onto the market than was rented, on track with Reis' earlier project of about 67.6 million square feet 2009. If the forecast holds true, 2009 will be the worst year for net absorption of office space since Reis began tracking it in 1980. (Reporting by Ilaina Jonas; editing by Andre Grenon)

Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 700 articles with more than 18,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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Condition of Banks Continues to Deteriorate (Chart)

The Report of Condition and Income for All Insured U.S. Commercial Banks continues to deteriorate and is worrisome.

This really calls into question if the new bank bailout plan is going to work. The newest proposal is similar, if not the same, as the plan that was put into effect in September. However, if conditions continue to deteriorate it is likely that banks will need to be seized by the Federal government much like what happened during the Savings and Loan crisis.

Right now the hope remains that banks can earn their way out of the problem. This explains, in part, why the Federal Reserve is keeping interest rates artificially low and is buying Treasury securities. This strategy worked for the banks in the 1992-1993 period. It is not well known but many banks were "technically" insolvent at the time.

It appears that bank failures, a bank panic, and bank nationalizations are all still real possibilities.

We will continue to watch this situation at All American Investor.

Sidenote: Federal regulators Friday seized control of the two largest wholesale credit unions — U.S. Central Federal Credit Union and Western Corporate Federal Credit Union — which together had $57 billion in assets. This went virtually unnoticed.

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Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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TALF a Trillion for Commercial Real Estate

If you live in Florida one thing you notice is empty stores in malls. In Delray Beach we have one of those giant strip malls--lots of empty space. It is really startling to see. Restaurants in business for 20 years or more--gone. Circuit City, Linens and Things, you name it gone. And, associated businesses around these anchors--going, going, gone. The mall in Boynton Beach, Walgreens, now closing at 7 PM.

The goal is to head off a “looming crisis” that could spread far beyond “For Rent” signs and shuttered mall shops--Federal Reserve Chairman Ben Bernanke

“Empty stores in a mall deters shoppers just like it deters them in downturn areas if there is vacant space at street level,” says Todd Sinai, an associate professor of real estate at the Wharton School at University of Pennsylvania in Philadelphia. “Then if your retailers stop selling you cannot get new tenants.”

In carrying out the Financial Stability Plan, the Department of the Treasury and the Federal Reserve Board are announcing the launch of the Term Asset-Backed Securities Loan Facility (TALF), a component of the Consumer and Business Lending Initiative (CBLI). The TALF has the potential to generate up to $1 trillion of lending for businesses and households.

Here comes TALF to the rescue. One potato Wall Street, two potato banks, three potato homeowners, and a steak for commercial real estate.

The Treasury is readying a giant bailout for commercial real estate properties as rents fall and vacancies rise. Is this the next shoe ready to drop?


See Fed Press Release and Real estate woes seep into malls, office towers

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Bob DeMarco is a citizen journalist, blogger, and Caregiver. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. The content has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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