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“The froth is still working itself out,” Richard Parkus, Deutsche Bank head of Commercial Mortgage-
backed Securities and Asset-Backed Securities Synthetics Research said at the Reuters Global Real
Estate Summit in New York. “We are currently in something which is comparable to what we saw in the
1990s and potentially worse.”
U.S. commercial real estate values could fall by more than 50 percent from the peak in 2007, he said.
Although asking rents are down about 28 percent in New York, factoring in free rent and other perks by
landlords, rents are down about 50 percent, Parkus said.
“Rents will be back to where they were in 2017,” Parkus said. Building prices also will take six to eight
years to recover, he said.
The U.S. commercial markets are deteriorating at an increasing pace as rent dries up and demand
plummets. That is leaving borrowers struggling to make their monthly mortgage payments.
“The number of new loans that are becoming delinquent each month are defaulting at rates between 5
percent and 8 percent per year, with the most loosely underwritten loans of 2007 defaults at 8 percent per
year, Parkus said. That puts accumulated losses at about 4 percent this year, and 12 percent over the
next four years.
Loans loses ranged between 7 and 11 percent a year during the commercial real estate crash of the
early 1990s.
“We are not only not approaching stability, we are at a period of maximum deterioration,” Parkus said.
I usually don’t excerpt an entire column but this one was so short and, at least to me so startling, that I
didn’t want to grab pieces or put my own spin on the facts.
This wasn’t supposed to happen. Time and again we’ve heard from government officials, banks and so-
called experts that the one fairly bright spot was commercial real estate. It wasn’t supposed to be over
built as it was in the 90’s and, yes it would take its lumps, it wouldn’t be one of the real problems in
recovery. I guess you throw that one out the window!
For my money, Deutsche Bank has some of the best research and on the ground intelligence to be found
in the CRE sector, so I take them pretty much at their word. A lot can happen but they don’t even have to
be half right for this to turn into one spectacular crash. In that case, recovery is going to be even slower
and more difficult than many have forecast. If residential and commercial construction do not rebound in
any significant manner in the next year or two, this country is in for a prolonged period of anemic growth.
I started by referring to the community banks that are having problems paying their TARP funds. Those
banks are stuffed to the gills with commercial property loans. I don’t think it’s overstatement to say that if
the losses approximate Deutsche Bank’s projections that thousands of banks are going to be
compromised to the point of failure.
If memory serves me correctly, I think the S&L bailout cost a bit over $100 billion. I may be low on that
number. This one might well be many multiples of that number and could dwarf what we’ve paid out for the
big banks. Maybe we need to take a look at what we’re facing before we go all in on health care, more
fiscal stimulus, “green” investments and whatever else strikes the fancy of the Washington establishment.
I get the feeling we might have to dig deep for some more fundamental problems.
Original Article
backed Securities and Asset-Backed Securities Synthetics Research said at the Reuters Global Real
Estate Summit in New York. “We are currently in something which is comparable to what we saw in the
1990s and potentially worse.”
U.S. commercial real estate values could fall by more than 50 percent from the peak in 2007, he said.
Although asking rents are down about 28 percent in New York, factoring in free rent and other perks by
landlords, rents are down about 50 percent, Parkus said.
“Rents will be back to where they were in 2017,” Parkus said. Building prices also will take six to eight
years to recover, he said.
The U.S. commercial markets are deteriorating at an increasing pace as rent dries up and demand
plummets. That is leaving borrowers struggling to make their monthly mortgage payments.
“The number of new loans that are becoming delinquent each month are defaulting at rates between 5
percent and 8 percent per year, with the most loosely underwritten loans of 2007 defaults at 8 percent per
year, Parkus said. That puts accumulated losses at about 4 percent this year, and 12 percent over the
next four years.
Loans loses ranged between 7 and 11 percent a year during the commercial real estate crash of the
early 1990s.
“We are not only not approaching stability, we are at a period of maximum deterioration,” Parkus said.
I usually don’t excerpt an entire column but this one was so short and, at least to me so startling, that I
didn’t want to grab pieces or put my own spin on the facts.
This wasn’t supposed to happen. Time and again we’ve heard from government officials, banks and so-
called experts that the one fairly bright spot was commercial real estate. It wasn’t supposed to be over
built as it was in the 90’s and, yes it would take its lumps, it wouldn’t be one of the real problems in
recovery. I guess you throw that one out the window!
For my money, Deutsche Bank has some of the best research and on the ground intelligence to be found
in the CRE sector, so I take them pretty much at their word. A lot can happen but they don’t even have to
be half right for this to turn into one spectacular crash. In that case, recovery is going to be even slower
and more difficult than many have forecast. If residential and commercial construction do not rebound in
any significant manner in the next year or two, this country is in for a prolonged period of anemic growth.
I started by referring to the community banks that are having problems paying their TARP funds. Those
banks are stuffed to the gills with commercial property loans. I don’t think it’s overstatement to say that if
the losses approximate Deutsche Bank’s projections that thousands of banks are going to be
compromised to the point of failure.
If memory serves me correctly, I think the S&L bailout cost a bit over $100 billion. I may be low on that
number. This one might well be many multiples of that number and could dwarf what we’ve paid out for the
big banks. Maybe we need to take a look at what we’re facing before we go all in on health care, more
fiscal stimulus, “green” investments and whatever else strikes the fancy of the Washington establishment.
I get the feeling we might have to dig deep for some more fundamental problems.
Original Article
| Commercial Real Estate Free Fall by Tom Lindmark, June 23, 2009 |
Sometimes it pays to be late to a story. In this case, the decline in commercial
property values probably has a lot to do with the problems community banks
appear to be facing which I discussed in the post below.
First, the facts. According to the WSJ, Moody’s Investors Services reported today
that their index of commercial real estate property prices fell 8.6% in April (see
graph for the trend, click for larger view). With the April fall-off, prices are now
down about 25% from last year at this time. The Moody’s survey covers multi-
family, office, retail and industrial properties so it’s pretty comprehensive. For the
wonkish among you, here is a link that describes their methodology.
That’s bad enough, but now let me share a few comments from Deutsche Bank
today on the subject of the commercial real estate market. It comes from Reuters:
The U.S. urban commercial real estate markets probably will not recover until
2017, the head analyst of commercial mortgages for Deutsche Bank Securities
property values probably has a lot to do with the problems community banks
appear to be facing which I discussed in the post below.
First, the facts. According to the WSJ, Moody’s Investors Services reported today
that their index of commercial real estate property prices fell 8.6% in April (see
graph for the trend, click for larger view). With the April fall-off, prices are now
down about 25% from last year at this time. The Moody’s survey covers multi-
family, office, retail and industrial properties so it’s pretty comprehensive. For the
wonkish among you, here is a link that describes their methodology.
That’s bad enough, but now let me share a few comments from Deutsche Bank
today on the subject of the commercial real estate market. It comes from Reuters:
The U.S. urban commercial real estate markets probably will not recover until
2017, the head analyst of commercial mortgages for Deutsche Bank Securities
| ButThenWhat.com is an attempt to connect dots and figure out what is going on in business and politics, stripping away personal interest. Lindmark's Bio Visit the blog at ButThenWhat,com. |
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