“CMBS Markets More Hardy Than Doomsters Speculated” Costar Reports
Costar published the above article today in their weekly newsletter which can be found using the following link.http://www.costar.com/News/Article/CMBS-Markets-More-Hardy-Than-Doomsters-Speculated/125639?ref=100&iid=214&cid=B5B015168BBA401BC0BE69E52AEB4267
The premise of the article is as the Headline suggests. I would contend this is nothing more than Hype and Spin. As the article reports, there was $16 billion in CMBS issuance in 2010, which is nothing to get excited about. The article cites that Fitch had predicted a 12% delinquency rate which turned out to be around 10% (which is still a record BTW) on CMBS loans and that the $16 billion in new issues is 30% higher than first predicted for 2010. Keep in mind at the height of the CMBS bubble in 2007 a total of approximately $280 billion was completed. To suggest in 2011 the total amount of CMBS bonds will go to $50 billion doesn’t tell any story or can be deemed optimistic. Are the numbers better than 2009 certainly, but in no way does that mean it is a return to anything approaching normal activity.
The article goes about reporting how due to mortgage modifications and foreclosures and a “new” methodology of foreclosing and re-selling the property with the “old” financing in place to new buyers it is helping reduce the defaults in overall terms. And many of the “modifications” are due to the lack of people within the CMBS Special Servicer Business and because of the overwhelming amount of distressed CMBS mortgages that are on the books, they have agreed to do the expedient thing in order to reduce their backlog. That does not sound like a rosy picture, but yet the article slants this as a good thing because it is getting bad mortgages off the books. I suggest these servicers are just kicking the can down the street as another form of extend and pretend that will eventually come back to bite to them.
What is not being talked about in detail are the $300 billion in commercial loans due to mature in 2011, and about the same amount in 2012. As those loans mature, the values of most of those properties have dropped to between 25%-40% off their highs which is when 50% of the commercial real estate stock of properties traded in the 2005-2007 time period, depending upon which market the properties are located. Add to this the low LTV (Loan to Value Ratio’s) and higher than normal Debt Service Coverage Ratio’s (Amount of net income the property is generating to service the debt) which lenders have insisted upon as a result of the mortgage meltdown, remember, too lax underwriting standards (including CMBS) and you have a bad combination for the lenders to deal with never mind the property owner. An added problem is where is the money coming from to pay for the high amounts of TI tenants are expecting landlords to pay for on top of the major concessions such as rent abatement etc. Please note the National office vacancy rate is reported to be around 16.5%-17%. Therefore there is plenty of vacant space to be rented. If the landlord’s can even find a lender for the TI, it will be at extremely high interest rates in the form of Mezzanine Debt (basically 2nd mortgages secured by the equity of the borrower has in the entity that actually owns the property). Further, as most commercial properties are owned in what are called “Single Entity” ownership structures, usually there is not much or close to nothing remaining in those entities as far as equity . So Good luck with that approach.
In addition the article refers to the CMBS Bond’s higher yields than the safe haven US Treasuries…which is the attraction for investors thus increasing demand by investors for this financial product. Well ladies and Gentlemen what do you think got us to the situation we have found ourselves in since the end of 2007? You got it, chasing yield without regards to the REAL fundamentals driving the commercial real estate market.
So here we are 3 1/2 years out from one of the worst economic collapses in World History and the Wall St. gang along with the accomplices in the Commercial Real Estate Industry are touting the fact the CMBS market is remarkably regaining it’s strength.
What is not being taken into account are the simple laws of Economics 101. Continuing high unemployment, as just yesterday it was published new jobless claims shot up by 45,000 people due to post holiday retailer’s laying off their seasonal help. Of course the experts predicted a much lower total of claims, but then again they say that was to be expected meaning post Holiday layoffs, talk about trying to cover both ends. The Labor Department is reporting approximately 9.5 million people are still collecting unemployment benefits, while the true number of the unemployed (since the Labor Dept does NOT count those that have given up looking for work or who’s benefits have run out) is approximately 17 million. Just reported by the Federal Reserve…”The Philadelphia Federal Reserve Bank reported factory activity growth in the Mid-Atlantic accelerated less than reported” Gee can’t imagine why?
Then there is the continuing decline of the tragic housing market.As the housing market goes, so goes the United States economy. The housing market is tied to so many industries it can’t help but make such an impact. It was reported this week by several media outlets that 2010 saw 1 million home foreclosures! There is an inventory estimated to be 7 million homes that have been foreclosed upon. Housing experts state there is an approximate 4 year supply of housing stock without building one more house. Fannie & Freddie are bleeding tax dollars at an unbelievable clip.The CASE-SHILLER index is predicting a housing double dip which negatively impacts the U.S. consumer’s attitude about the future. As a matter of fact the Consumer Confidence Level dropped just last month, so much for retail sales momentum coming out of the Holiday Season!
Now let us factor in the price of oil and gasoline. Oil closed today at near $100 per barrel. Gas prices have risen sharply in a short period of time. In England there are already Government concerns about how the higher gasoline prices there will negatively affect the British economy. Well the same is starting to happen here which is inflationary and counter economic growth anyway you want to look at it.
Already articles are popping up suggesting a new food price spike is about to occur due to the increases in fuel costs and much lower crop yields which is driving the price increases for food on a Global basis. You can just about kiss any significant improvement in the retail sector goodbye with these factors alone, however what this means is retailers are still under major stress. It was reported by the ICSC the authority on retail real estate, that although retailers had improved sales over this past Holiday Season the vacancy rate for neighborhood and community type shopping centers (which are the majority types of centers throughout the United States) went up not down. What this means is further stress on property owners to mange their debt payments…Huh? Yep that is correct. The only commercial sector that really has a chance to significantly improve is the Multi-Family (Apartments) property type. directly due the housing collapse as people who have lost their houses need someplace to live. Ironically this sector has seen the largest percentage of mortgage defaults of all the sectors mainly due to over leveraging during the bubble, which was due to misguided judgment on how rapidly the apartment rental market’s prices would increase. The failed Stuyvesant Town/Peter Cooper Village in NYC sold by MetLife right before the bubble collapse is a prime example and that single default helped in the Multi-Family sector’s high default rate and has become the poster child in the CMBS Mortgage market’s collapse. To note it was the buyer’s expectations of how much they would be able to raise rents and/or convert the units to Condo etc as the determining Factor which contributed to the default on over $5 billion in CMBS Loans on that property, as those expectations of rental increases never materialized.
Another factor being totally ignored are the Budgets for just about every State in the Union. Every State including Texas which was one of the few that were dealing relatively well with their State’s economy, are having major budget problems. States are required to have “Balanced Budgets” unlike the United States Government. Illinois reported today they will be raising State Income Taxes by 66%. Sorry to my liberal friends, but when the Government sucks out that amount of money from their Citizens, what do you think happens to consumer spending? This is a rhetorical question. What this means are higher state taxes and/or cuts in State services which means State Employees being laid-off in great numbers. Even the Federal Government has announced they will be laying off several thousand workers most likely in the DC region and trying to reduce their physical footprint. I will bet not many have read the reports about how much commercial real estate the Federal Government leased or absorbed in 2010….How does 3.5 million square sound at high market rental rates. How does the fact the Feds were responsible for approximately 60% + of the total office absorption rate in the entire United States sound? This was reported by Jones Lang LaSalle. That party is now over. So the “improved” fundamentals being reported and hyped are a direct result of the Feds commercial real estate activity. That is not good since so many so called industry experts are predicting the Private Sector who is supposedly sitting on an estimated $2 Trillion in Cash will be rapidly rehiring and expanding. But wait…are these the same Corporations sitting on so much Cash that cut their spending by laying off personnel? Companies have learned to operate with fewer number of employees which is why the National Productivity rate has climbed. Add to this advances in technology and the push towards worker’s telecommuting as another dampening effect on office vacancy rates. Just today Friday 1/14 it was reported that Virginia Governor Bob MacDonald is looking to pass tax incentives to Corporations increasing their percentage of telecommuting workers.
The issue here is the fact the majority of industry participants are overly hyping and falsely predicting how much better both the economy and commercial markets will be going forward. Remember these are the same folks that got us into this mess to begin with, so why now would we trust their insight, judgment or predictions.
What makes matters even worse is that Data Providers and industry associations such as the MBA, NAR etc are putting a Spin on the weak statistics acting as cheerleaders for the industry when they should be Neutral Observers and Reporters of events. Please note the better the commercial markets are the better the Data Provider’s bottom lines will improve as they have also been negatively impacted by this economic collapse as well as those working within the industry and the respective associations. Just take a look at the Mortgage Banker Association’s National HQ which was foreclosed upon about two years after the MBA bought the property and moved in. Ironically Costar eventually bought the property out of foreclosure for it’s new Corporate HQ. The same folks are now wanting you to believe in them again when they couldn’t even keep their own house in order. Truly unbelievable.
It seems any amount of upward improvement no matter how weak the numbers are in reality are being touted as the beginning of the end of the downturn in the commercial real estate market, instead of it being said that it is no more than bumping along the bottom which is what is actually happening. No one has ever said all business comes to a complete halt even during the worst of economic times.
As I predicted what was going to happen during the bubble years that economic growth and continuing upward movement of commercial real estate pricing was not at all sustainable; I was told I was being too negative and contrary. I said I was just looking out for the those being led to believe business cycles have only one way to go but up in a straight line and you don’t want to be the last person holding the hot potato. All the unrealistic gains made during the bubble years have been given back and then some.
Trust me I have been down this road all too many times to want to remember, but remembering and questioning everything is what I do.
As the old adage says so succinctly…’Those who forget history are doomed to repeat it”; Today’s business folks seem to be suffering from Short Term Memory loss as it has only been a few short years since the economic collapse began, which was directly related to the Securitized Mortgage Market which is being promoted once again as the be all of commercial real estate financing.
Believe who you want, but I suggest you look at the “Big Picture” before you invest.