The Next Bubble to Pop: Commercial Real Estate & Debt
Putting out the fire, with kerosene...
As if the current problems with residential real estate, housing, the economy, debt markets...
and the impending LBO and stock buy back debt crisis were not enough cake to swallow...
Throw in the imploding commercial real estate bubble and its debt problems for icing.
On 09/17/07, the 10 year yield 4.46%, since, four Fed interest rate cuts, taking Fed funds down 175 bps from 5.25% to 3.5%.
Todays 10 year yield 3.56%, taking the 10 year yield down 90 bps to the lowest since 2003.
Meanwhile, a 30 year fixed jumbo went up 3 bps to 6.56%; the 30 year fixed conforming went down 40 bps to 5.47;
and the cost of borrowing for apartment buildings, offices, retail properties and hotels climbed as much as 125 basis points or 1.25%.
The $3.2 trillion commercial market is starting a slide that mirrors the housing decline...
where prices have dropped for the first time since the Great Depression. Why? All the same reasons... its Deja Vu all over again.
Easy money, stupid investors or too much money, greed and too few brains...
About 70% of commercial mortgages are pooled into CMBS commercial mortgage backed securities that are sold to investors.
Wall Street underwriters allowed lending guidelines to slacken because they needed the mortgages to feed the $760 billion market for securities backed by commercial mortgages.
Lending standards became more lax because people knew they wouldn't be keeping the loans on their books.
The vast majority of commercial mortgages in new bonds required payment of interest only, without any reduction in the loan's principal.
Banks tighten, yields widen... Commercial loan rates are based on spreads, or the difference between the amount of money CMBS promise to pay investors over what the 10 year Treasury bill will pay.
On Jan 16, the spread for a security's AAA tranche widened to 125 basis points, or 1.25%, from 26 basis points a year earlier.
The spread on the B tranche, five levels below AAA, grew to 1400 basis points or 14% above the T bill.
As a result, the number of new CMBS commercial mortgage backed securities, which help fund loans, dropped 54% in Q4 from a year earlier. Why?
If banks can't securitize the loans, they won't make them. Further, there will be loans coming up for maturity that will be difficult to replace or refinance.
Kenneth Rosen, an economist at UC Beserkeley: Delinquencies of securitized commercial mortgages may quadruple in the next 18 months to almost 4 %. Why?
As the loans become due, the higher or more stringent refi terms will impact cash flow and debt service ratios, leading to more defaults, such as...
Ian Bruce Eichner, a New York developer, who defaulted on a $760 million loan from Deutsche Bank AG last week for his Cosmopolitan Resort & Casino on the Las Vegas Strip.
Deutsche Bank will continue to pay for construction while Eichner negotiates a new deal, according to Perini Corp., the project's general contractor.
David Tobin, at Mission Capital Advisors:
"The market is locked up right now because there's a huge overhang of leveraged assets of every type,
development deals that won't meet projections made last year when things were rosy... It will end just like the residential housing market."
Hattip to Bloomberg.
As if the current problems with residential real estate, housing, the economy, debt markets...
and the impending LBO and stock buy back debt crisis were not enough cake to swallow...
Throw in the imploding commercial real estate bubble and its debt problems for icing.
On 09/17/07, the 10 year yield 4.46%, since, four Fed interest rate cuts, taking Fed funds down 175 bps from 5.25% to 3.5%.
Todays 10 year yield 3.56%, taking the 10 year yield down 90 bps to the lowest since 2003.
Meanwhile, a 30 year fixed jumbo went up 3 bps to 6.56%; the 30 year fixed conforming went down 40 bps to 5.47;
and the cost of borrowing for apartment buildings, offices, retail properties and hotels climbed as much as 125 basis points or 1.25%.
The $3.2 trillion commercial market is starting a slide that mirrors the housing decline...
where prices have dropped for the first time since the Great Depression. Why? All the same reasons... its Deja Vu all over again.
Easy money, stupid investors or too much money, greed and too few brains...
About 70% of commercial mortgages are pooled into CMBS commercial mortgage backed securities that are sold to investors.
Wall Street underwriters allowed lending guidelines to slacken because they needed the mortgages to feed the $760 billion market for securities backed by commercial mortgages.
Lending standards became more lax because people knew they wouldn't be keeping the loans on their books.
The vast majority of commercial mortgages in new bonds required payment of interest only, without any reduction in the loan's principal.
Banks tighten, yields widen... Commercial loan rates are based on spreads, or the difference between the amount of money CMBS promise to pay investors over what the 10 year Treasury bill will pay.
On Jan 16, the spread for a security's AAA tranche widened to 125 basis points, or 1.25%, from 26 basis points a year earlier.
The spread on the B tranche, five levels below AAA, grew to 1400 basis points or 14% above the T bill.
As a result, the number of new CMBS commercial mortgage backed securities, which help fund loans, dropped 54% in Q4 from a year earlier. Why?
If banks can't securitize the loans, they won't make them. Further, there will be loans coming up for maturity that will be difficult to replace or refinance.
Kenneth Rosen, an economist at UC Beserkeley: Delinquencies of securitized commercial mortgages may quadruple in the next 18 months to almost 4 %. Why?
As the loans become due, the higher or more stringent refi terms will impact cash flow and debt service ratios, leading to more defaults, such as...
Ian Bruce Eichner, a New York developer, who defaulted on a $760 million loan from Deutsche Bank AG last week for his Cosmopolitan Resort & Casino on the Las Vegas Strip.
Deutsche Bank will continue to pay for construction while Eichner negotiates a new deal, according to Perini Corp., the project's general contractor.
David Tobin, at Mission Capital Advisors:
"The market is locked up right now because there's a huge overhang of leveraged assets of every type,
development deals that won't meet projections made last year when things were rosy... It will end just like the residential housing market."
Hattip to Bloomberg.
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