reckless monetary policies, unwarranted regulatory forebearance,
Hollywood-style accounting, and investors' short memories, the commercial
real estate market has in recent times been a bastion of tranquility,
attracting the interest of yield-chasing institutions and individuals alike.
But some developments suggest the tide is turning.
For one thing,
as HousingWire details in "November Bank Failures Tied to CRE Exposure, More Closures to
Come," the excesses of the past are still coming home to
roost, especially in the banking sector.
The five banks
that failed in November were victims of exposure to commercial real estate,
analytics firm Trepp LLC said Monday.
data follow the pattern exhibited throughout 2011, in which bank failures
spiked in the month following the end of a quarter and then dropped during
the subsequent two months. Eleven banks failed in October — also
because of CRE exposure.
Total bank failures
this year now stand at 90, putting the annualized pace just under 100 for
2011. Nearly 300 banks were shuttered by regulators in 2009 and 2010
Meanwhile, market conditions
look to be less than supportive, as the Credit Union Times reveals in "Fed: Commercial Real Estate Still Sluggish."
the latest Fed’s Beige Book, released Thursday, nearly all of the 12
districts said CRE market activity has not experienced any significant
Boston, Chicago, Cleveland, Dallas, Kansas City, Minneapolis, New York,
Philadelphia, Richmond, Va., San Francisco and St. Louis make up the
York, Chicago, Minneapolis and San Francisco indicated roughly unchanged
activity while Philadelphia and Dallas indicated mixed activity. Richmond and
St. Louis reported slow activity, although industrial construction had picked
up. The Fed said New York and Philadelphia reported generally weak
steady to slowly improving commercial construction and Chicago and
Minneapolis experienced modest to moderate increases, the Fed reported.
confirm a deteriorating outlook, including this one from Pensions & Investments,
entitled "Risks Rising as Realty Firms Buy From, Sell to Each Other":
Adding to pressures
to sell is the fact that some of the properties in managers' portfolios are
either becoming distressed or are in need of capital infusions that managers
do not have.
fund managers that were able to access capital did so two or three years ago.
Due to poor fundamentals, we have seen once-transitional properties that were
subsequently stabilized becoming transitional again,” said Jarret Cohen, head of private real estate at Fir Tree
Partners Inc., a New York-based hedge fund firm. “Some owners are unable
to contribute additional capital for leasing and required maintenance, and
thus will likely sell their properties.”
there are the unwelcome realities of the CRE refinancing cycle. As the Wall Street Journals'
Developments blog notes in "Commercial Delinquencies Down, for Now," the
loans granted to finance dodgy deals done at the height of the boom are
beginning to come due.
rate on U.S. loans tied to commercial mortgage-backed securities ticked down
in November, with payments at least 30 days late for 9.51% of all such loans,
according to real estate research service Trepp
While the rate
was down from 9.77% in October, it’s hovered in the mid-9% range
throughout the year, and there are few signs that it’s likely to change
any time soon. About $15.5 billion of loans made in 2007 — back when
loans with loose standards were still common — are set to mature next
year, according to Trepp. The firm expects more
than half of those to head into special servicing, when a distressed loan
specialist considers a rework of the mortgage.
pain in the commercial real estate world — a healthy delinquency rate
is below 1% — comes as job growth has been anemic and investors are
wary about the direction of the economy, particularly given the turmoil
across the Atlantic.
of reckoning is here for the class of 2007 originated loans,” Trepp wrote in its monthly delinquency report.
To top it
all off, real estate insiders are growing more pessimistic about their
"Commercial Real Estate Execs Trim Expectations Amid Weak Job
Growth, Political Gridlock, Regulatory Uncertainty"
Roundtable’s Q4 Sentiment Index Drops to 2009 Levels
concerns about the pace of economic recovery, Washington’s ability to
address fiscal and tax policy challenges, a host of new regulatory
requirements, and the long-term European debt situation, The Real Estate
Roundtable’s latest “Sentiment Index” of commercial real
estate executives slid for the second quarter in a row — hitting its
lowest point since the fall of 2009.
So much for
that light at the end of the tunnel.
Michael J. Panzner