CRE Loan Volumes Fall in Q3
Submitted by
CalculatedRisk on Thu, 11/15/2007 - 7:59am (56 comments)
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Does anyone know which companies would suffer the most if there is a meltdown in CRE?
CRE loans are decreasing very fast if the rest of lending institutions follow Countrywide's trend. I suppose the economic impact of such slowdown is not inmediate. How long would it take to feel full impact in terms of employment?
OT: here is a paper that you may find interesting on housing cycles in the US and the EU not supporting the "decoupling" theory.
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I would think most REITs would take a hit from a turn down in CRE. REIT's are a large portion of the investment world these days. This says nothing about asset backed commercial paper that is backed by CRE projects.
I seem to recall that one recently changed it's status (from tax advantaged REIT to commercial concern) because of the recent turn down. However, don't quote me on that until I find a cite for you.
CR,
If Q3 CRE loans were down, then shouldn't non-residential investment also be down for the same period?
Or is the relation more like MEW, where the cashed out money is used over a six month period?
U.S. Department of Commerce. Bureau of Economic Analysis
I don't doubt that CRE is entering a slowdown. However, you shouldn't believe that Countrywide is at all representative of the CRE market.
OT -- sorry about the detour, but futures purchases this morning are HUGE. The Treasury/I-banking/hedgie cabal is working VERY hard this morning to keep things from crashing.
This may be a very interesting day.
I think it might have been Novastar I was remembering that converted from REIT tax status (allowing it to pass tax through to investors with the dividend) to a conventional C corp because it couldn't pay the dividend.
http://www.earthtimes.org/articles/show/news_press_release,224452.shtml
Hoss - Commercial went splat this summer. We are now into the default period, in which the regionals are taking major hits.
REBear, it's a 3-6 month lag on average, and then you start to see it in employment and building. Sept-Oct was the onset of effects, and they should peak in the first half of 2008.
Thanks MOM
Hoss - you shouldn't believe that Countrywide is at all representative of the CRE market.
Hoss, no, they aren't. At a time when most banks were beginning to pull back, they surged in. They are going to take a fearful licking.
Foolish JG,
The cabal you name is actually in the midst of a civil war! Jon Markman says so!
For an elite few, credit pain means profit - MSN Money
BTW, has anyone ever seen AC and Markman together????????
Off Topic - Fall out from SIV crisis coming to a school near you.
Public School Funds Hit by SIV Debts Hidden in Investment Pools - Bloomberg.com
"Public School Funds Hit by SIV Debts Hidden in Investment Pools"
"...
State pool losses may hit taxpayers in places like Jefferson County in the form of reduced services or higher taxes.
Jefferson County's Wilson says he still trusts the Florida pool managers and will keep the school's money in the fund. I really hope this isn't any worse than we know today,'' he said after the Nov. 14 meeting.If something happened to that investment, our county would be devastated.''
State officials have no business putting taxpayer money into debt investments that have baffled even the most seasoned Wall Street executives, says Joseph Mason, finance professor at Drexel University in Philadelphia and a former economist at the U.S. Treasury Department.
Municipalities shouldn't be playing like they're expert investors, squeezing the last penny out of SIVs,'' Mason says.They're making a giant jump into a new product area which has unknown, unforeseen risks.''
Thousands of school, fire, water and other local districts across the U.S. keep their cash in state- and county-run pools. These public accounts, modeled after private money market funds, are supposed to invest in safe, liquid, short-term debt such as U.S. Treasuries and certificates of deposit.
All told, there were about 100 such pools, containing more than $200 billion at the end of 2006, according to Westborough, Massachusetts-based iMoneyNet, a research firm that tracks these funds.
Public fund managers say they've bought SIV debt because it had the safest credit ratings and offered higher yields than other short-term fixed-income investments.
...
If public funds lose money, towns and local agencies could raise taxes, sell more debt or, more likely, trim budgets, Turner says. ``Cutting spending usually means people losing jobs because someone else didn't do their job,'' he says.
..."
Tiki, the anti-REIT play that several of us here on this board have is SRS. It's an ETF that goes double-short the Dow Jones Real Estate Index. It's risky but I'd recommend it now. If you are conservative, just put half the money in it and keep the other half in SIV-free money market.
SRS did really well from Feb-August of this year. Then, it fell sharply and hasn't recovered much yet. Given how much REITs appreciated over a decade, SRS should fall a lot farther if CRE declines. It's $100 today and my target is around $140.
My understanding is WAB is most exposed of any bank to commercial real estate. I could not tell you where I saw that figure, though.
REBear, exactly. Non-residential investment is based on loans taken out in earlier periods.
Also note that the CFC loan data is their pipeline - not their loan volume. Their pipeline is drying up.
I don't know if CFC is representative - it's just one data point - but we are getting the same signal from multiple sources. See also the Fed's October Loan Officer Survey for CRE.
Best to all.
This is a great article. I'm starting to believe ground zero for a lot of bad stuff will be Florida. I think all of Florida is about to become another Orange County. I think revenue bond failures in Florida will take down all municipal bond insurers. I think Florida will cause Corus and other condo lenders to fail and eventually require the FDIC to be recapitalized.
Florida is becoming an economic hell hole.
The ripple effect: Lumber prices down 22% demand at its lowest in 50 years and some mills have months of supply on hand. In the last 7 - 10 days I have never seen so many layoffs and mill closings.
Here are some exaamples:
Buchanan Forest Products, Atikokan Forest Products parent company, is shutting down four of its mills, including the sawmill at Sapawe, until the end of January, putting a total of close to 800 unionised employees out of work. The decision will affect 170 hourly workers at AFP.
Sapawe mill closed to end of January, at least
Seven million dollars that the Marengo County Commission planned to lend to Linden Lumber could be in jeopardy after the company laid off more than 100 employees last week.
One of Marengo Countys largest private employers, Linden Lumber narrowly avoided foreclosure in September, in part because of the commissions commitment. Since then, the company has laid off at least 185 of its 425 employees
http://www.tuscaloosanews.com/article/20071108/NEWS/71108003/1007/dateline&cachetime=3&template=dateline
Potlatchs Prescott plant has laid off employees, effective Nov. 12, according to information from Potlatch media spokesman Matt VanVleet.
During a Nov. 9 telephone interview, VanVleet said, We intend to resume on Nov. 26.
VanVleet attributed the layoff to the current market condition for lumber and demand. He said market lumber prices are some of the lowest in the past couple of years
Nevada County Picayune-Times - Prescott, AR - Nevada County Picayune-Times
MOYIE SPRINGS -- Riley Creek in Moyie Springs will lay off its 70 hourly workers for two weeks this month and one week in December, said company owner Marc Brinkmeyer.
Employees not working from Nov. 19 to Dec. 1
http://www.bonnercountydailybee.com/articles/2007/11/13/business/business02.txt
Dropping lumber prices, the credit crunch and the continued housing slump, are putting the hurt on Oregon's wood products industry.
Another round of layoffs are affecting workers in Lane County and parts of Southern Oregon.
200 more mill jobs are being whittled from the payrolls of three companies. Officials all point to the slumping housing market as the chief reason
Oregon lumber mills set to shed 200 jobs |
KVAL CBS 13 - News, Weather and Sports - Eugene, OR
- Eugene, Oregon
| News
Here in Bozeman Montana the developers are going nuts building office building. If you drive around town there are for-rent signs every were on existing buildings, some of these signs have been up for two or three or more years. A number of building that have been finished this year are mostly vacant, but they keep on building.
REBear,
I cant tell what type of CRE loans these are from the article. But there could be several lags. Construction loans are drawn down as the building goes up but i bet they origination value shows up at the beginning. Once the building is up and operational some times up to five years later there is a take out loan for the value of the property. And then there are loans for existing buildings that are many years old. So people could still be building (non-residential investment) but not need the loans yet. In fact I'd argue that the loans wont be there when they are needed.
Commerical real estate looking pretty dire in UK as well.
FT.com / UK - Gloom grows for UK commercial property sector
Barley, terrible news. Thanks for the links. Poor folks.
"Florida is becoming an economic hell hole."
Remove "economic", my friend.
I made the mistake of taking a contract position there this year.
I retired in June '07 from the State of FL at age 50, receiving my monthly state retirement check and letting the wifey work. Sounds like a good plan back in June.
I am becoming a little concerned about my monthly retirement checks after hearing about State of Florida losing 2 billion in yesterdays news.
Should I be concerned about not receiving my monthly check and count on Florida through its taxing power to assure I will get paid?
Note: Florida is number one when it comes to fully funding its state employees pension plan...
Any comments...
Still enjoying the good life in SW FL
I retired in June '07 from the State of FL at age 50, receiving my monthly state retirement check and letting the wifey work. Sounds like a good plan back in June.
Perhaps not to the wifey...?
CRE is fine, these are sophisticated investors.
On a side note, a friend of mine bought a large commercial building for half its appraised value. The owner wanted out quickly. Real values are way down, they just have not been booked by a sale.
I have two friends who are contractors in CRE in Arizona. They work around the clock and still have a lot more work than they can do. They also said residiential has picked up again recently (that was in the 5 minutes I actually could talk to them).
O-Joe
"Should I be concerned about not receiving my monthly check and count on Florida through its taxing power to assure I will get paid?"
Check your plan - do they pay you for life at a constant amount/month, is there a time limit (eg. 25 years?)
Banker, yep, there are going to be many, many civil wars.
In today's San Diego Union-Buffoon, on the front page, was illustrated the fight between California's socialist legislature -- looking to close the budget shortfall -- and California's socialist teachers union -- don't cut spending here.
Breaks my heart to see the Bolsheviks feasting on their young (and I look forward to my farm/ethanol subsidy-loving Republicans getting shafted, too).
NEW YORK (Reuters) - Wells Fargo & Co (WFC.N: Quote, Profile, Research), which has sidestepped many of the credit and liquidity problems plaguing U.S. mortgage lenders, believes the nation's housing slump is the worst since the Great Depression and is far from over, Chief Executive John Stumpf said
Wells Fargo: Housing worst since Great Depression
| Reuters
Once the building is up and operational some times up to five years later there is a take out loan for the value of the property.
That shouldn't matter. We all know that real estate always goes up
Thanks nades
Thansk CR.
While current defaults are few and far between, concerns with
regard to current underwriting have a strong foundation. Offseting
exceptionally low cap rates, cash flow assumptions used in
underwriting have grown increasingly aggressive over the last
year. Between the second and third quarters, the inflation of
net operating income (the difference between most recently
reported NOI and projected NOI) used in the calculation of underwritten
debt service coverage eased only somewhat. For
loans collateralized by multifamily properties, weighted average
NOI inflation fell from approximately 9% to just below 8%. For
office loans, underwritten NOI remains 14% higher than the reported
level. Only a small subset of markets have experienced
fundamentals gains that can support these differences. In the
majority of office markets, the gap between reported and projected
income will close over a period of years except for those
properties where lease rollovers are significantly accretive to
revenue.
To compensate for the relative shortfall in property income, the
share of interest only loans has increased dramatically over the
last year. This trend continued into the third quarter, with the
share of interest only loans climbing to almost 70% of the total
fixed rate loan count. This systematic increase in interest only
financing reflects the inability of borrowers to amortize principal
balances with current property income given the extent of leverage
on historically high transaction valuations and refinance
appraisals.
You need to expand your circle of friends beyond optimistic people.
"Dont fight the Fed"
The Bank of England Governor has issued an extremely unusual warning on world stock markets, indicating that shares may be heading for a major fall.
Mervyn King said the full impact of the credit crunch had not yet been felt on equity markets in the West and in developing countries, saying that the possibility of share price falls were one of the biggest risks facing the world economy
Markets poised for severe fall, says King - Telegraph
the above from 3Q Reis report
O-Joe:
Here in Tucson the house inventory keeps rising but there are still building projects going on, more or less. One close to me has equipment all over the place but I seldom see any activity. Maybe the owner is renting it out as a parking lot for unused construction equipment? LOL.
virtualco,
I don't think your pension is in jeopardy. It may take Florida a decade to recover, and taxes will go up in the state. But Florida is much better off long-term than some other states where I would not be as optimistic about state pensions. At the top of the list...
NJ
Then:
MI, OH, IN, IL, PA
This is where America is rotting from the inside. These states are becoming big depressed ghettos. People are starting to move out permanently. This is what happens when a country throws manufacturing in the toilet.
From thei peaks about Feb 2007;BXP down 23.8%;IYR down 24.5%; AVB down 23.6%. In my opinion we still have a ways to go. Cap rates are increasing and lenders are tightening their underrighting standards.
Has this been noted or posted before?
y John Spence
Last Update: 11:51 AM ET Nov 15, 2007
BOSTON (MarketWatch) - Home builder TOUSA Inc.'s (TOA:tousa inc com
News, chart, profile, more
Last: 0.16-0.09-35.92%
11:41am 11/15/2007
TOA 0.16, -0.09, -35.9%) third-quarter results "strongly indicate existing shareholders will be completely wiped out, or at the very least diluted to almost nothing," wrote Morningstar Inc. analyst Eric Landry in a research note Thursday. The troubled company, which operates mostly in Florida, late Wednesday said its quarterly loss widened and that it may be forced to file for Chapter 11 due to the housing slump. Landry estimated the company's book value is now less than zero. Several smaller, private builders have already gone under and last week Levitt and Sons, a unit of Levitt Corp. (LEV:levitt corp cl a LEV 2.16, -0.10, -4.4%) , and 37 of its subsidiaries filed for Chapter 11 bankruptcy protection, citing the "sudden and steep" housing pullback in Florida and the Southeast. Shares of TOUSA were off 8 cents, or 32%, to 17 cents Thursday morning
And Sam Zells IQ increases daily
Does anyone know which companies would suffer the most if there is a meltdown in CRE?
Tiki |
Beside REITS, Life insurance companies will see probably the quickest impact as they do the most accurate, and in my opinion honest, mark to markets on CRE debt every quarter.
That said, a typical life company has 50% to 70% of their portfolio in corporate bonds (these provide a higher duration to match with life policies), with only 15% to 25% in commercial real estate debt. The debt they issue is almost always higher quality then CMBS debt as well... but downgrades are downgrades.
The $40 Apr08 put options on ING look fairly attractive at $2.75. The $17.50 Apr08 puts on AEG also look good at 0.55... those would both be high risk plays with a 50% chance at 100% loss (and hopefuly 50% chance at 200%+ return). Jan09 puts are still scarely traded and IMO look priced too high.
"I retired in June '07 from the State of FL at age 50, receiving my monthly state retirement check and letting the wifey work. Sounds like a good plan back in June.
I am becoming a little concerned about my monthly retirement checks after hearing about State of Florida losing 2 billion in yesterdays news."
I would look at the sentiment of the French population regarding the current strike there. 50 is awfully young when life expectancy is well into the 70s. When working people start to struggle economically and don't have a pension that supports a nice early retirement, they can become pretty unsympathetic.
A lot can change in 20 years.
Wow, living in "economically depressed" upstate NY doesn't look half so bad any more. For the last 20 years we've been hearing how awful it is around here and how WUNNERFUL everything is in the Sun Belt. I guess the "wunnerful" bill is finally coming due.
The housing market seems pretty normal around here. Never got superheated, of course. You can still buy a nice Cape Cod with a good sized yard in a good school district for $120K.
You mean like those who predicted 10 of the zero recessions/depressions in the last three years?
O-Joe
Forbes - Is Your Bank At Risk of Failure? (More articles are being printed about coming bank failures - I was the Investigator-in-charge at Superior Bank's summer 2001 closing and there was NO assuming bank. It was a payout by the FDIC. One doctor depositor had in excess of $1 million on deposit at Superior with $100,000 coverage - which received wide local Chicago media attention.
Is Your Bank At Risk Of Failure? - Forbes.com
Dallas Morning Snooze - Commercial real estate the flip side of residential - for now (front pg of today's business section)
Commercial real estate the flip side of residential - for now |
News for Dallas, Texas | Dallas Morning News
| Dallas Business News
Dale,
Are some of the Old Industry (i.e. paper mills, specialty chemicals) plants still remaining starting to rehire?
I think GE just announced 500 new jobs in Schenectady.
But generally we've been dealing with the aftermath of "manufacturing flight" for 20-25 years here... things have stabilized and diversified. There is a lot of small manufacturing still surviving, but no, the big guys (Xerox, Carrier etc) have pretty much fled.
It just sounds a lot more sane around here. Humble, but sane.
Sign of the times: that $120K Cape Cod I mentioned is next door to me. Sold in 3 weeks. Family originally from the area, returning from North Carolina.
Engle Homes owner contemplating bankruptcy
Didn't some residential sub contractors from Georgia who really worked hard get zilch?
OT -- sorry about the detour, but futures purchases this morning are HUGE. The Treasury/I-banking/hedgie cabal is working VERY hard this morning to keep things from crashing.
This may be a very interesting day.
jg
what metric's are you using to determine this stat of yours?
FFDIC: did they pay the doctor one million or $100,000?
How about a thread on which sectors will make up for any potential slump in RE?
The Philadelphia Federal Reserve Bank said its business activity index was at 8.2 in November versus 6.8 in October. Economists polled by Reuters had forecast a reading of 5.0.
O-Joe
James - the poor doctor was paid $100,000 at first and given a FDIC receivership certificate for his balance. This quickly hit the local media. Much later, the Pritzker family settled w/FDIC and most if not all of the uninsured depositors were paid additional amounts. I do not believe they were made whole, however that is possible given the large settlement with the bank's owners - much larger than most. However, this process took many months if not years to settle while the uninsured depositors waited for their funds from the FDIC's Claims Department in Dallas, TX. Regards.
TradingStats, I use this site:
Intraday Futures Prices - Markets Data Center - WSJ.com
End the end of the trading day, I record in my Minitab worksheet the volumes for 'SP 500 - Mini - cme' and 'SP 500 Day - cme.'
Yesterday's volume in the Mini was 1.9MM; today, the volume is already at 3.1MM.
jg
how do u quantify futures volume? what do u follow?
Two hat tips in two days. I'm on a roll...(and thanks)