It seems like every couple of days there's a new burst of articles on the state of commercial real estate. At one extreme, you have stories breathlessly running off one or two metrics that show that commercial real estate is going to destroy the economy. A common one is the Deutsche Bank figure that up to 65 percent of the $1.4 trillion in commercial mortgages coming due by 2013 will have trouble getting refinanced.
That works out to just more than $900 billion. It sounds terrifying. But let's put that into a little perspective. The pain is being spread out over four years. (And that assumes none of these loans will get extended, which has not been what we've seen so far.) Remember, as well, that the idea is that those loans will have “trouble” getting refinanced, not that they will all default. And remember that by 2012 and 2013 we may be in a much different lending climate than we're in today. So I'm guessing the dollar value of loans that truly default will be much lower than that $900 billion figure. And with everything the government has done for the financial system, along with relaxed rules on mark-to-market accounting that are allowing banks to hold off on writing down commercial real estate loans, aren't we set to with these inevitable losses?
At the other extreme of the commercial real estate narrative spectrum, you have stories that argue that we're bouncing along the bottom now and things are already getting better. I think that's pushing things too far. There are signs of stabilization. But we cannot ignore that commercial real estate fundamentals are still eroding. And even if the economy is growing, there are no signs that jobs are being added. And jobs will be the single biggest factor in determining the direction of real estate fundamentals in the coming months and years.
I think the narrative that makes the most sense is to acknowledge there are problems in the industry. It's been a bad time in commercial real estate since early 2007. There are many problems to deal with, including figuring out if the commercial mortgage-backed securities market is coming back and dealing with those loan maturities. But as bad as things might get, commercial real estate is not going to drag the economy back into recession and it seems likely that Congress may be itching to do more.
Let's look at the latest round of these stories.
Forbes got things going with a forecast piece published Sunday on the heels of Tishman Speyer LP and Black Rock walking away from their $5.4 billion investment in the Stuyvesant Town project in Manhattan. The article takes the stance that while the move by Tishman and Black Rock was a blow, it isn't indicative of a coming tsunami. The piece recognizes that commercial real estate has been hurting for some time. Ultimately, the experts quoted in this story think prices on commercial real estate are bottoming right now and will begin their slow climb back up later this year.
But just when you start to feel like we're moving in the right direction, there's more and doom and gloom. Yesterday, we were greeted with a proclamation from Standard and Poor's--“Industry Outlook: The Worst May Still Be Yet To Come for U.S. Commercial Real Estate Loans”. Square Feet blog wrote about the report and embedded it in a post. There's an important distinction here, of course. The Forbes piece was looking at commercial real estate in its entirety and specifically the question of values. The S&P report, meanwhile, is analyzing the sector's debt. The forecast is shaped by broader fundamentals, but S&P isn't looking at where values are going. Instead, it's looking at how falling rents and rising interest rates will be problematic for loans as they come due. The blog post has some other good commentary.
REIT Wrecks, meanwhile, has 6.8 Trillion Reasons why commercial real estate won't derail the broader economic recovery. The argument is that commercial real estate debt--at $3.3 trillion out of the total commercial real estate market size of $6.8 trillion--isn't large enough to slow momentum in other areas. I would add to that observation the fact that even though we're going to see high default rates on commercial real estate mortgages for a while, it's not as if all $3.3 trillion of that debt is going to go bad. And we know that most of that debt is not expiring before 2013.
So where do you think we are in the cycle?
Here are today's otherand notes from retail and retail real estate.
- One major plus for commercial real estate is that investment funds capitalized by private equity firms and the U.S. Treasury have bought $3.4 billion in toxic mortgage bonds under the administration's Legacy Securities Public-Private Investment Program (PPIP), according to DSNews.com. Of that, $440 million are commercial mortgage-backed securities. The Treasury released its first PPIP report last Friday that detailed the program's progress.
- Real Capital Analytics has purchased Real Estate Econometrics. Sam Chandan will join the firm as global chief economist and executive vice president, and a member of the firm's management committee.
- Macy's Inc. opened the first non-U.S. Bloomingdale's in Dubai.
- Despite all the rancor over the health of commercial real estate, REITs have had a strong run of late, although a Wall Street Journal piece says they aren't completely in the clear yet. In part, the story wonders how much of an upside REITs still have considering they've already rallied considerably from last March's lows. Fundamentals don't look poised to improve strongly. Things might not get worse, but perhaps the optimism should be tempered a bit.
- Ron Burkle is a busy guy. He's making pushes to buy big stakes in two different retailers. He continues to pursue Barneys New York. He's been buying up as much of the firm's debt as he can get his hands on. In addition, he appears to be making a run at Barnes & Noble and is trying to buy up 37 percent of the book chain.