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NOT SO FAST......
That cetainly sounds like the conclusion of the dozen or so large and midsize banks that gathered this week in New York for a Barclays investor conference.
“Following commentary from our financial services conference, we believe commercial real estate prices may have bottomed for the time being, resulting in no meaningful markdown” of assets in the third quarter, says Barclays banking analyst Roger Freeman today in a research note about Goldman Sachs Group.
The statement was part of Freeman’s reasoning for getting more bullish about the coming third-quarter earnings from Goldman Sachs Group. It raised his earnings estimate to a range of $3.90 to $4.50 a share, compared with the consensus estimate of $3.65-a-share.
Other banks are also getting more confident about their real-estate exposure, even about the biggest problem areas such as construction loans to home builders. At the conference, Marshall & Ilsley said its construction loan delinquencies are showing signing of flattening in the third quarter. City National said its homebuilder book also is showing signs of stabilizing.
“Almost every bank said their CRE portfolio should relatively outperform,’’ wrote Freeman’s Barclays colleague, Jason Goldberg in a research note from the conference on Thursday.
However, Goldberg added parenthetically ” (not sure how that works).”
Deal Journal isn’t sure how it works either.
The commercial real- estate market seems like it still has a long way to fall. Even signs that the economy is improving isn’t likely to lead to quick reversal in high vacancy rates in the office market, where much of the distress is being felt . That is because hiring likely will lag behind other economic indicators in the early stages of any recovery.
Also putting pressure on values are the increasing delinquencies in $700 billion commercial mortgage-backed securities market.
By the end of 2012, close to $100 billion of the loans that comprise CMBS are likely to face difficulty being refinanced because real-estate values have fallen so far that the borrowers won’t be able to extend existing mortgages or replace them with new debt.
As this leads to foreclosures, it will further depress values of the $1.7 trillion in commercial real-estate loans sitting on bank balance sheets, leading to more write downs.
For the most part, banks have been able to contain commercial-real-estate losses by extending debt when it has matured so as long as the property owner can make interest payments. But that is likely going to get harder as rents decline, leaving the borrowers with less cash.
While there are signs of a recovery, lingering and pending defaults will add continuted pressure to the markets. By offering releif to commercial real estate owners, we can help offset some of this pressure
Don
CPR Team -
Check out this article on defaults for commercial loans. It is bad and getting worse. This is our opportunity to help these owners, the banks and ourselves. Our webinar is coming up in the next couple weeks. Stay tuned for dates and times....
To success,
Don McClain
US Commercial Real Estate Default Rate At 15-Year High
Published on: Thursday, June 11, 2009
One thing that becomes more evident during a recession is how all parts of the economy are interconnected. When consumers lose their jobs they stop buying. Fewer customers means some small businesses can no longer afford to pay their rent. Which brings us to the fact that commercial real estate owners are experiencing the highest default rate in 15 years. For more on this see the following article from Property Wire.
The default rate of US commercial real estate bank loans has reached its highest level in 15 years and is not expected to peak until 2011, according to a new report.
During the first quarter 2009 the national default rate for commercial real estate mortgages held by regulated depository institutions rose to 2.25% from 1.62% in the fourth quarter of 2008, according to the report from property research firm Real Estate Econometrics.
The 0.63% jump is the largest quarterly increase since at least 1992 and pushed the default rate to its highest level since 1994, the New York based firm said. The default rate does not include loans on apartments, which increased by 0.68% between the fourth quarter of 2008 and the first quarter of 2009 to 2.45%.
Real Estate Econometrics attributed the default surge to rising vacancy rates, falling rents and increasing operating expenses all of which made it more difficult for borrowers to meet principal and interest obligations.
Additionally, those borrowers who had been current were not able to refinance or sell their properties in order to meet payments required by maturing mortgages because of tight lending conditions.
It is mortgages that originated in 2006 and 2007 that have experienced the most significant cash shortfalls because a large number of them were based on overly aggressive rent and occupancy projections.
'Increasingly, a challenge in refinancing these mortgages is that some lenders are seeking to diversify away from commercial real estate, while others are lending only with existing relationships,' the report said.
Real Estate Econometrics revised its default projections higher. It sees the default rate rising to 4.1% by the end of the year, up from its previous forecast of 3.9%. By the end of 2010, the default rate is expected to rise to 5.2%, up from estimates of 4.7%.
Analysts from the firm expect the default rate for US commercial property loans held by banks to peak at 5.3% 2011, up from its forecast of 4.8%.
Analysts commented that the revised forecasts are due chiefly to a more pessimistic outlook for the overall US economy, a projected rise in long-term interest rates and a slower than expected policy response to commercial real estate credit constraints.
