The amazing thing is how long it took since the start of the credit crunch. It's a year since the cracks in Bear Stearns began and 3 quarters since it really took hold.
This will be the 2nd leg of the double dip recession, the tepid uptick in retail should be the spike.
The homebuilders are still building, why would commercial builders quit? That is a serious question--the homebuilders still (apparently) have access to funding, and consequently are still putting up houses even in the face of the biggest residential market slowdown ever. If commercial builders have access to that same funding, I would expect exactly the same, more commercial construction going up.
I suspect that this time around, it will be the banks who fail first, followed by the (residential and commercial) builders, not the other way around as in times past. The banks are so heavily invested in construction loans that they have no choice but to keep putting up funding. Shutting off funding would doom ongoing projects and lead to massive losses for the bank, so they keep the funds coming, hoping desperately that the markets will turn around and that their loans won't go bad. Just like the gambler who is so badly deep in debt that his only choice is to sit at the table and keep rolling the dice.
CRE was as overbuilt as RRE, it's just that smaller banks are the ones who jumped in with both feet, not the top 10.
If BofA and Suntrust both have the same rate of delinquencies in their CRE portfolio, BofA will write that off as a rounding error while SunTrust will have to raise a massive amount of capital to stay afloat or go TU.
A big chunk of BofA's portfolio are BofA towers they were building in various markets(like NYC) these buildings were one stop shops from construction.
CRE is just as big, it's just lagging. Once a commercial project is underway, you just don't stop it midway. The funding for these projects were all secured years ago, hence the lag. There has been no funding recently for these types of projects, but that doesn't show up in the commercial side for years.
the supplier chain depending on the continued growth in this segement seems to be getting crushed on higher imput cost and slower sales, must be a very tough market today.
Its unfortunate they have so many grammatical and spelling errors - especially the first page typo using the largest font used in the report.
Naturally, they followed with bad data and misinterpretations of data. They're "outstanding CRE debt is off by nearly a trillion dollars - mainly because they're excluding nearly half of the multifamily from the Fed's Flow of Funds report, and it appears that they may also be missing all S&L originated debt (another $200+ billion). In actuality, there is about $3.3 trillion outstanding CRE. They are headed in the right direction with CRE price declines, and I don't know anyone out there who doesn't expect a decline in values in the double-digits. This is mostly going to affect commercial banks and S&Ls, and it'll also focus around C&D loans.
They also mistakenly avoid the inflation topic, which is a little brazen when we're talking about CRE. Their point about CMBS spreads being near some floor because of weakening fundamentals is just incorrect. They also left out the lack of supply in CMBS in coming months which actually should provide some kind of ceiling on spreads.
CR seems to be on the right track, and I'm not disputing any of CR's comments. However, the Wachovia report was notably written by a couple of economists and was not run by any CRE people who would have caught some of the blatant errors - it reminds me of a Goldman report written by their banking analysts on the CRE topic from earlier in the year, which was promptly retracted in part and embarrassing in it's entirety.
My only regret is that I just read through the entire thing so I could make this comment - I should have just stopped after page 2.
When I got more time in the next few weeks I am going to blog on some vulnerable companies with highly leveraged CRE portfolios. But my pics right now for those looking for CRE short opportunities are RWT, NCT, and JRT. All are structured as REITs.
I stopped reading these comments much because it seems that there hasn't been much intelectual thought, analysis or real questions anymore. just a bunch really "funny" wise cracks at peoples/companies/economy/etc expense. I guess i just don't find it that funny. Maybe the place has devolved into a bunch of 12 year olds commenting,...or maybe just a bunch of losers who feel better about themselves at the expense of others troubles by pointing out how smart they were to avoid the same troubles. In reality, like most things in life, the answer is probably somewhere in the middle.
The amazing thing is how long it took since the start of the credit crunch. It's a year since the cracks in Bear Stearns began and 3 quarters since it really took hold. - Alec
Now thats actually a very good point, think about how long ago credit began to tighten in commercial lending,...it actually started in March of '07, picked up more steam when Moodys widened sub levels on CMBS deals, and then of course between August '07 to today has basically been shut down except for super tight underwriting.
Today, the main weekness is in C&D condo and land loans etc. Here we are a year plus later and CMBS is still at near historic lows in deliq rates. The '06, and '07 vintage cmbs deals, with the more aggresive underwriting, are still performing infinitely better when compared to similar structure late '80s 1 and 2 year seasoned CRE loans.
For all the many negative things the derivative products such as CMBX and ABX have created, the CMBX (with a little subprime help) sure did help quickly change the face of CRE lending by tightening standards well before seeing any poor performance issues. Will be interesting to see how these two issues (CMBX levels vs underlying deliq rates) play themselves out over the next couple years.
I believe one of the reasons you are not seeing a similar number of defaults in the commercial world is that borrowers have been required to put down substantially more than on the residential side of things. In our market at least, the most leverage you could get was at 90% ltv. That was using either an SBA product or one of several conventional lenders. More typical has been 15% - 25%. These are for owner-occupied industrial or office buildings.
Both GE and Lehman have been offering 90% ltv for owner-occupied buildings, although I heard recently that GE has tightened up considerably.
Wachovia (the part that was involved with the securitization of commercial loans-forget the exact permutation of their name) had a report out last August that noted there would be a credit crunch developing in the 4th quarter of 2007. Given the lead times in large commercial construction this corresponds very well with the AIA billing index, and a 4th quarter construction crunch.
CR: your forcasts: not so good. LOL.
You stayed too wedded to the concept that housing construction drives commercial construction: it only does in a very soggy rubberband sort of way.
That loks an awful lot like a Wright Model B inverting.
That forecast seems extremely optimistic to me. Try around -30%.
Yes, mild compared to '01.
The amazing thing is how long it took since the start of the credit crunch. It's a year since the cracks in Bear Stearns began and 3 quarters since it really took hold.
This will be the 2nd leg of the double dip recession, the tepid uptick in retail should be the spike.
--
"Also - this coming slump in CRE is one of the reasons the FDIC and the Fed are so concerned with bank failures later this year."
But the important thing to remember is that CRE was not as overbuilt as RRE and, hence, the threat to bank failures due to CRE is lot smaller.
Jas
The homebuilders are still building, why would commercial builders quit? That is a serious question--the homebuilders still (apparently) have access to funding, and consequently are still putting up houses even in the face of the biggest residential market slowdown ever. If commercial builders have access to that same funding, I would expect exactly the same, more commercial construction going up.
I suspect that this time around, it will be the banks who fail first, followed by the (residential and commercial) builders, not the other way around as in times past. The banks are so heavily invested in construction loans that they have no choice but to keep putting up funding. Shutting off funding would doom ongoing projects and lead to massive losses for the bank, so they keep the funds coming, hoping desperately that the markets will turn around and that their loans won't go bad. Just like the gambler who is so badly deep in debt that his only choice is to sit at the table and keep rolling the dice.
Jas,
CRE was as overbuilt as RRE, it's just that smaller banks are the ones who jumped in with both feet, not the top 10.
If BofA and Suntrust both have the same rate of delinquencies in their CRE portfolio, BofA will write that off as a rounding error while SunTrust will have to raise a massive amount of capital to stay afloat or go TU.
A big chunk of BofA's portfolio are BofA towers they were building in various markets(like NYC) these buildings were one stop shops from construction.
CRE is just as big, it's just lagging. Once a commercial project is underway, you just don't stop it midway. The funding for these projects were all secured years ago, hence the lag. There has been no funding recently for these types of projects, but that doesn't show up in the commercial side for years.
the supplier chain depending on the continued growth in this segement seems to be getting crushed on higher imput cost and slower sales, must be a very tough market today.
Its unfortunate they have so many grammatical and spelling errors - especially the first page typo using the largest font used in the report.
Naturally, they followed with bad data and misinterpretations of data. They're "outstanding CRE debt is off by nearly a trillion dollars - mainly because they're excluding nearly half of the multifamily from the Fed's Flow of Funds report, and it appears that they may also be missing all S&L originated debt (another $200+ billion). In actuality, there is about $3.3 trillion outstanding CRE. They are headed in the right direction with CRE price declines, and I don't know anyone out there who doesn't expect a decline in values in the double-digits. This is mostly going to affect commercial banks and S&Ls, and it'll also focus around C&D loans.
They also mistakenly avoid the inflation topic, which is a little brazen when we're talking about CRE. Their point about CMBS spreads being near some floor because of weakening fundamentals is just incorrect. They also left out the lack of supply in CMBS in coming months which actually should provide some kind of ceiling on spreads.
CR seems to be on the right track, and I'm not disputing any of CR's comments. However, the Wachovia report was notably written by a couple of economists and was not run by any CRE people who would have caught some of the blatant errors - it reminds me of a Goldman report written by their banking analysts on the CRE topic from earlier in the year, which was promptly retracted in part and embarrassing in it's entirety.
My only regret is that I just read through the entire thing so I could make this comment - I should have just stopped after page 2.
Now we are going to see the increase in unemployment. . . right?
The unemployment is already there, the establishment survey doesn't capture it.
When I got more time in the next few weeks I am going to blog on some vulnerable companies with highly leveraged CRE portfolios. But my pics right now for those looking for CRE short opportunities are RWT, NCT, and JRT. All are structured as REITs.
One I already posted on, and has since declined about 40% since then, is First Mariner Bank in Maryland. See here:
Will First Mariner Bancorp (FMAR) be the next small bank to go bankrupt? « Greg’s Law & Economics Blog
As to unemployment, I am seeing more people sending me resume's and stopping by my office door looking for work. In Miami-Dade.
And yes, they keep on building.
I stopped reading these comments much because it seems that there hasn't been much intelectual thought, analysis or real questions anymore. just a bunch really "funny" wise cracks at peoples/companies/economy/etc expense. I guess i just don't find it that funny. Maybe the place has devolved into a bunch of 12 year olds commenting,...or maybe just a bunch of losers who feel better about themselves at the expense of others troubles by pointing out how smart they were to avoid the same troubles. In reality, like most things in life, the answer is probably somewhere in the middle.
The amazing thing is how long it took since the start of the credit crunch. It's a year since the cracks in Bear Stearns began and 3 quarters since it really took hold. - Alec
Now thats actually a very good point, think about how long ago credit began to tighten in commercial lending,...it actually started in March of '07, picked up more steam when Moodys widened sub levels on CMBS deals, and then of course between August '07 to today has basically been shut down except for super tight underwriting.
Today, the main weekness is in C&D condo and land loans etc. Here we are a year plus later and CMBS is still at near historic lows in deliq rates. The '06, and '07 vintage cmbs deals, with the more aggresive underwriting, are still performing infinitely better when compared to similar structure late '80s 1 and 2 year seasoned CRE loans.
For all the many negative things the derivative products such as CMBX and ABX have created, the CMBX (with a little subprime help) sure did help quickly change the face of CRE lending by tightening standards well before seeing any poor performance issues. Will be interesting to see how these two issues (CMBX levels vs underlying deliq rates) play themselves out over the next couple years.
Best,
es
I believe one of the reasons you are not seeing a similar number of defaults in the commercial world is that borrowers have been required to put down substantially more than on the residential side of things. In our market at least, the most leverage you could get was at 90% ltv. That was using either an SBA product or one of several conventional lenders. More typical has been 15% - 25%. These are for owner-occupied industrial or office buildings.
Both GE and Lehman have been offering 90% ltv for owner-occupied buildings, although I heard recently that GE has tightened up considerably.
Wachovia (the part that was involved with the securitization of commercial loans-forget the exact permutation of their name) had a report out last August that noted there would be a credit crunch developing in the 4th quarter of 2007. Given the lead times in large commercial construction this corresponds very well with the AIA billing index, and a 4th quarter construction crunch.
CR: your forcasts: not so good. LOL.
You stayed too wedded to the concept that housing construction drives commercial construction: it only does in a very soggy rubberband sort of way.