Let’s see, Leon Black of Apollo Management, which is a very savvy real estate player, warned of a coming “black hole” in commercial real estate six months ago.
US bank regulators seem to be taking warnings of his sort seriously only now.
The Fed is poking its nose into the portfolios of some banks, oddly taking great care to say these are NOT stress tests (is that meant to say they are not bogus and actually involve people who might know a tad about the underlying assets?)
Reader John L provided this tidbit:
I just spoke with a friend who does environmental studies for banks before they lend against the properties. He said that the FDIC is in the process of getting pre-approved bidders for work of this sort, mostly sampling of the air and soil on the sites.
His problem was with the bidding process, they wanted a flat bid for a sample from the northeast (NY, VT, MA, NH, CT, RI, PA, DE). His answer was to quadruple his cost. The majority of the cost is getting someone there(background check required) to take the sample. The US was split into 7 zones. Flat item bid for each type of sample in each zone.
Just thought it was interesting, maybe the FDIC is thinking they are going to have to get into the CRE buisiness in a big way.
For those who are curious about such matters, the consultant looks at the deed to see who owned the property in the past, which determines whether sampling is needed. Pretty much every gas station is a Superfund site. Dry cleaners and auto repair shops also get flagged.
The Financial Times reports on the Fed’s efforts. This is being positioned more as research than bank-level exams, but it begs the question of why they waited so long to get the overview.
In its regulatory role, the Fed will look into a cross-section of banks to build a picture of how resilient institutions are to the troubled market…
A cross-disciplinary team will look at the variety of commercial real estate assets on banks’ balance sheets, encompassing loans and commercial mortgage-backed securities…
Commercial property prices are now 26.9 per cent lower than one year ago and 33.9 per cent below the level seen two years ago, according to an index compiled by Moody’s Investor Service. Values on commercial property prices are now 35.5 per cent below the peak seen in October 2007.
Commercial real estate ”is ground zero for the distress happening over the next 3 to 5 years,” said Rich Friedman, head of Merchant Banking at Goldman Sachs on Wednesday. It will be five to six years before there is any real improvement, Mr Friedman added. Real estate deals were often more leveraged than the buyout deals done at the height of the bubble, precisely because there was so much leverage, to refinance will be a huge challenge…
Positive news about the broader economy is unlikely to be “manifested commensurately in CRE,” he said. “The fact that we don’t have 10 banks a day going under [does not mean] that things are not as bad as we thought…We have a relatively enormous amount of deleveraging that has to take place.”…
But some with links to smaller banks believe the doomsday consequences of the troubled market have been over-played. “I don’t think it’s the doom and gloom scenario that we had in housing,” said Steve Brown, chief executive of Pacific Coast Bankers’ Bank, which serves thousands of community banks. “Spreads are tightening in a lot of the paper that’s out there.”
Like the stock market is going to care.
I suspect that Mr. Friedman’s 3 to 5 year estimate is predicated on the fact that the financing for a lot of properties is and will be coming due. The bulk of the properties that are in distress were bot on cap rates south of 6%. That’s a rate that implies unacheivable growth in NOI. That’s a rate that presumes that the initial debt can be rolled at will.
Well, the world has changed a bit and the mantra today is debt reduction, which has as it’s companion wealth destruction and the severe reduction in the supply of loanable funds. Given the amount of unwarranted debt that was created, we have a very long time of impaired markets ahead of us.
Also, the CRE debt debunkle is coming due just as the last of the option arms are due for reset. Lovely convergence. We are headed for credit crunch II. As well as Goldman and the financial industry appear to be recovering today, it will be very interesting to see how well they are doing come this time next year.
stocks are a proxy for everything and CMBS AAA, series 1, bids have rallied huge, up to about 93/94..not sure how much more they can go. Series 5, in low 80s
Whatever media is talking about, and I hear you and think there is some problem with cmbs out there, its being overlooked in bids for CMBS AAA – which is about 80% of the notional outstanding and biggest picture as to perceived health of the cre sector
Here’s a good postmodern explanation for this:
As I type this I’m looking at this new Trump Tower here in Chicago, with a 95% vacancy rate, wondering what crazy bank financed this monstrosity…
Thanks for the help
I wonder how small lenders will figure into the FCIC investigations, which kicked off yesterday. Marshall Auerback’s call yesterday for the commission to think of the financial system as a means, not an end, gets the commission on the right track, and implies a good look at all this too…but it’s one commission, and the mandate doesn’t last forever. Should we be prioritizing?