http://www.triplepundit.com/2009/11/sustainability-lessons-learned-hitchhiking-the-real-estate-cosmos/
By Martin Melaver
Recently, I've been reading with my son The Hitchhiker's Guide to the Galaxy. We're at that point in the story when our travelers arrive on the planet of Magrathea. Magrathea, you may recall, made a name for itself millions of years ago by specializing in building designer planets for the super-wealthy. Then, out of the blue, a severe economic recession hit the galaxy and demand for Magrathea's high-end product vaporized. The citizens of Magrathea decided to mothball the planet until market demand returned. Fast-forward five million years, and the Magratheans are still waiting. Talk about an allegory for our time.
In a recent webcast, Stephen Blank, Urban Land Institute's Senior Resident Fellow for Real Estate Finance, expressed what many in real estate already know and fear: that the downturn in residential real estate in 2007-8 was nothing compared to the tsunami coming at us in 2010 in the commercial sector. Values are likely to dip to 40 percent from three years ago, a commercial resurgence is not likely to occur until 2012, and the financial markets will continue to remain frozen except for the vulture plays stepping in with all-cash, low-ball purchases of distressed assets. Of the total $3.5 trillion in commercial debt out there, $900 billion is held in the problematic CMBS market. Thirty-nine billion dollars of that debt will be due in 2010; $150 billion by 2012.
http://www.reuters.com/article/GlobalFinance09/idUSTRE5AH5FM20091118
By Joseph A. Giannone
NEW YORK (Reuters) - Sooner or later, office buildings and other commercial real estate financed during the credit bubble will generate hurricane-scale losses for banks.
Banks in recent years have been hammered by losses on home mortgages, buyouts and corporate defaults. Now, lenders face big losses from loans backed by commercial real estate, where a stagnant economy will eventually take its toll, financial services executives told the Reuters Global Finance Summit.
"The commercial real estate business still has not been marked down. It's not been marked to market," Cantor Fitzgerald LP Chief Executive Howard Lutnick said. "The economy can't, in my opinion, grow fast enough that the tenants are going to go out and start hiring and growing and building and take up all these rents at $60 a foot. It's nonsense."
U.S. banks held $1.65 trillion of commercial real estate loans on their balance sheets as of November 4, according to the Federal Reserve. Total assets were $11.8 trillion.
Yet banks have postponed their day of reckoning, extending loans in hopes the economy will improve and demand for space will rebound. Banks have resisted selling assets, or taking them away from underwater borrowers, in fear of setting a new and lower market price.
It is a strategy neatly summarized as "a rolling loan gathers no loss," Lutnick quipped.
Lutnick, whose firm is now building out a real estate restructuring business, noted the equity invested in almost every transaction during the peak bubble years of 2005 through early 2007 has been wiped out. Lenders are under deep stress, because the value of their collateral has fallen.
FRIENDLY FED
But there is a limit to how long landlords can hold out for the old pre-recession rents. And once one building is marked down to reflect lower rents, neighboring buildings also should fall in value.
Lutnick added most commercial loans come in the form of five-year balloon loans, so a wave of 2005-vintage assets will test creditors next year.
"When you're in the eye of the hurricane, it sure feels good until you look at the TV screen and then you say, 'look, the hurricane is all around you,'" Lutnick said.
Banks do have a few things going in their favor. Chief among them is a friendly Federal Reserve, whose policy of free money lets banks reap windfall lending profits.
"The Fed has pushed interest rates down to nothing. The spreads on portfolios and securities are generating a huge amount of net interest income," Broadpoint Gleacher Securities Group (BPSG.O: Quote, Profile, Research, Stock Buzz) Chief Executive Lee Fensterstock said at the Summit. "That will enable them to resolve some of their commercial real estate positions."
The commercial real estate problem also pales in size next to the previous waves of mortgage, leveraged loan, credit card and other consumer loan losses.
FBR Capital Markets analyst Paul Miller, while generally negative on banks, on Wednesday played down the danger of commercial real estate losses. Continued...
GLOBAL ECONOMY WEEKAHEAD-A glimpse into the mind of the U.S. Fed
11.22.09, 3:00 PM ET
United States -
By Emily Kaiser
WASHINGTON (Reuters) - The Federal Reserve is about to provide a little more insight into how long an extended period of time might be.
The U.S. central bank, has been repeating that "extended period" phrase since March to signal that it intends to keep its benchmark short-term interest rate near zero for the foreseeable future.
With the U.S. economy now growing again, there is considerable debate about how far that horizon stretches.
After its last policy-setting meeting in early November, the Fed spelled out more clearly the economic conditions that it thought justified ultra-low rates -- namely high unemployment and subdued inflation trends and expectations.
On Tuesday, the Fed will release minutes from that meeting, offering a glimpse into its closed-door discussions that may provide more clues about when rates will go up.
A recent Reuters poll of economists found they expect the Fed to hold interest rates steady until the third quarter of 2010, even though the economy is likely to keep growing.
"We think the Fed will want to see several quarters of strong growth and a falling unemployment rate before it is willing to raise rates," said Barclays Capital economist Dean Maki, who expects modest tightening starting in September.
The Fed got three months of above-average growth in the third quarter, although revised figures coming Tuesday are expected to show the pace was not quite as peppy as the 3.5 percent annual rate that was initially reported.
Revised figures for Britain's economy, slated for release Wednesday, are expected to show its third-quarter contraction was not as deep as first thought, although the fact the economy was still shrinking has kept pressure on the Bank of England to do more to spur activity.
As for U.S. unemployment, that stands at a 26-year peak of 10.2 percent and is widely expected to stay abnormally high at least through 2010.
The Fed itself has predicted the jobless rate will remain above normal at least through 2011. Tuesday's minutes will include updated forecasts for economic growth and employment, and may show the central bank taking an even gloomier view.
Its June forecasts pegged unemployment in the range of 9.8 percent to 10.1 percent for 2009, but the actual figure has already exceeded that. Its 2010 forecast for 9.5 percent to 9.8 percent unemployment may also be nudged higher.
CHILLING WAKE-UP CALL
Some private economists think this recession has done even deeper structural damage to the job market, pushing the longer-run "normal" level of unemployment to somewhere around 6 percent rather than the 5 percent range that Fed officials had thought.
Indeed, the Fed's June forecasts show at least one of its policy-setting committee members thinks longer-run unemployment may now be 6 percent. If more officials have shifted to that view, the Fed's longer-run forecast could get bumped up.
For financial markets, a Fed promising cheap money indefinitely has helped to lift stock markets and steepen the yield curve, making lending more profitable for banks.
But global markets developed a case of the jitters last week after eight months of relative calm, reflecting a bit of uncertainty about the health of the economy and what that might mean for central banks' ultra-loose policies.
Lena Komileva, an economist with Tullett Prebon in London, thinks the recent market unrest may be an early warning of worse to come next year.
The Fed and its counterparts in Europe and elsewhere have cut interest rates to record lows and poured trillions of dollars into special lending programs to try to prop up the economy. Komileva said that succeeded in turning investor attention away from the sort of depression scenarios that were prevalent last year, but the effects may be temporary.
Reports last week showing the U.S. housing market still suffering from soaring defaults "made for a chilling wake-up call," she said. Investors responded by pulling money out of assets seen as risky.
If the recent wobbles are showing markets had assumed a healthier and speedier economic recovery than what has materialized, central banks will have to decide whether they can provide more assistance without sowing the seeds of future problems such as runaway inflation.
"In financial (market) valuations, the global economy now looks a bit too perfect," she said. "It appears that the effects of central banks'... anesthetic for global financial risks are beginning to wear off." (Editing by Neil Stempleman)
Copyright 2009 Reuters, Click for Restriction
Sponsored Links: http://fxsystemhosting.com/
www.easternshoretoyota.com
www.hyndaiofdaphne.com
