I'm in need of some desperate catching up. There was a bunch of big headlines about the commercial real estate crash. The latest to talk about the impending doom in commercial real estate were Wilbur Ross who sees a "huge crash in commercial real estate coming" and George Soros, who talked of a "bloodletting yet to come."
As Square Feet blog pointed out:
“In commercial real estate and leveraged buyouts, the bloodletting is yet to come,” Soros said today during a lecture organized by the Central European University in Budapest, where he was born. “These factors will continue to weigh on the American economy, and the American consumer will no longer be able to serve as the motor for the world economy.”
Really? The bloodletting is yet to come?
We've had bankruptcies, bank failures, properties given back to lenders, collapsed property values and all sorts of other nastiness. The bloodletting began a while ago and is continuing. There is more pain to come, but I continue to be mystified by the notion that's out there where it seems like people think that commercial real estate has skated along unscathed for years and will face a tortured future. The past year was pretty awful. The present isn't much better. But in some ways--the new rules easing commercial loan modifications, the fact that REITs stand on much stronger financial footing than even six months ago, the expansion of TARP to cover commercial real estate--the sector's outlook seems less ominous than it did this time last year.
The biggest issue I have with all of this is that there doesn't seem to be any sense of where we are in the process. Some talk about an impending crash--as if we haven't already seen a downturn in the sector for nearly two years.
Then again, Treasury Secretary Tim Geithner talked up the economy's ability to handle any hits it takes from commercial real estate. That's basically what I've been arguing. However, given Geithner's record so far, perhaps I need to rethink my position.
Regardless, here are a slew of headlines from the past few days to consider.
- There are two Business Insider posts worth looking at. For one, three of the nine banks that failed on Friday collapsed because of commercial real estate debt. A second post looks at how new rules will mean commercial real estate losses won't show up on bank balance sheets for a while. Essentially mark-to-market rules have been suspended. So banks won't have to writedown the value of commercial real estate debt, which most assuredly has some losses in due to deteriorating fundamentals and collapsing property values. Will this just suspend the agony for banks by pushing back the date on which they have to deal with these loans? Or will it buy banks time to wait for commercial real estate to recover in some way? The Associated Press has a good writeup of the new guidelines as well.
- Todd Sullivan wrote a lengthy post examining the banks various options in dealing with GGP's debt and how that relates to whether it's worth taking a shot on GGP's stock. In part because of the rule mentioned above, Todd sees banks continuing to grant GGP extensions on its debt. Therefore, he doesn't see massive defaults in GGP's future nor does he see private equity coming in and buying the debt from banks at a discounted price. Banks will extend because it's their only option to avoid massive writedowns in regards to GGP's debt. Because of all this, Sullivan sees GGP's share prices jumping to the double-digits as these extensions start coming.
- There's been a ton of back and forth all year on lease modifications. Are they happening on a large scale or not? Developers Diversified has reiterated all year that it is holding the line. The latest numbers are quoted here where the company says it has received 900 lease modification requests and granted just 41.
- Here are two pieces from CoStar. The first looks at some banks' seeming ho hum attitude towards commercial real estate. Is it all talk? Or do they have a handle on any problems that may emerge? The second story is a rundown of the third quarter for retail real estate. Overall, it was better than the first two quarters of the year, but it's not time to celebrate yet.