Close Attention: The collapse in commercial real estate could lead to anothe financial crisis!!
By Daniel at 11 August, 2009, 12:03 am
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The coming FOMC meeting will focus on the commercial real estate problem. CRE Vacancy has been skyrocketed for the past few month and current situation is very dangerous. Nearly 16% of office space in Los Angeles County is sitting vacant as tenants close up shop or move out of expensive properties. Nearly a third of the space around up-market Playa Vista sits empty; office buildings in the Inland Empire and parts of Orange County are completely vacant.
James Helsel, on behalf of the National Association of Realtors, is even more negative. He argues that this sector supports 9 million jobs and many of these are now in jeopardy. Of course, he is looking for a bailout of some kind (who isn’t?) but still he is right about emerging problems in and around the retail sector.
“July 9 (Bloomberg) — The $3.5 trillion commercial real estate market is a ticking “time bomb” that may lead to a second wave of losses at large U.S. banks, congressional Joint Economic Committee Chairwoman Carolyn Maloney said.”
There is currently about $3.5 trillion of debt associated with commercial real estate, about half of which is on the books of banks. Many credit unions and corporations have a lot of exposure on commercial real estate. From GS latest earning report, many commercial property related debts are expected to be default. There are lots of commercial property losses ahead, especially in shopping centers and offices.
The residential, commercial real estate account for $17.5T in market value, so far CRE only drop 14% and banks are expected it to drop 35%-45% from the peak through 2012.
http://investment-blog.net/worsening-conditions-in-commercial-real-estate-is-a-big-problem/
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“The Fed is “paying very close attention,” Bernanke, 55, told the Senate Banking Committee on July 22, the second of two days of semiannual monetary-policy testimony before the House and Senate. “As the recession’s gotten worse in the last six months or so, we’re seeing increased vacancy, declining rents, falling prices, and so, more pressure on commercial real estate.”
‘Danger Zone’
Amid such glimmers of improvement, commercial real estate is a “particular danger zone,” said Janet Yellen, president of the Federal Reserve Bank of San Francisco, in a July 28 speech in Coeur d’Alene, Idaho. The market may be “under stress for some considerable period of time,” William Dudley, chief of the New York Fed bank, said the following day in New York.
Nonresidential construction may decline as much as 9 percent this year and another 5 percent in 2010, predicts Kenneth Simonson, chief economist at Associated General Contractors of America, an Arlington, Virginia, trade group whose members include Essen, Germany-based Hochtief AG’s Turner Construction Co. in New York, one of the largest U.S. builders. In the second quarter, it accounted for 3.6 percent, or $509 billion, of U.S. gross domestic product on an annual basis, down from 4.3 percent in the final three months of 2008.
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The Fed’s efforts to revive credit may be overpowered by continuing job losses, even as the pace of those losses slows. U.S. employers eliminated 247,000 workers from payrolls last month, according to an Aug. 7 Labor Department report, bringing the cumulative reduction to about 6.7 million since the start in December 2007 of the worst contraction since the Great Depression.
‘Negative Fundamental’
“Demand for commercial space comes from employment and the income generated by that employment,” said University of Pennsylvania Professor Joseph Gyourko, director of the Wharton School’s Samuel Zell and Robert Lurie Real Estate Center in Philadelphia. Mounting job losses are a “really significant negative fundamental,” signaling that “conditions are going to be tough for the industry for a while,” he said. ”
http://www.bloomberg.com/apps/news?pid=20601109&sid=aTOaAnSiL7YM
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“The 1,120,000 lost US retail jobs in 2008 are a signal that the second stage of the real estate bust is about to hit the economy.
For a picture of the US real estate crisis, imagine New Orleans wrecked by Hurricane Katrina, and before the waters even begin to recede, a second Katrina hits.
The 1,120,000 lost US retail jobs in 2008 are a signal that the second stage of the real estate bust is about to hit the economy. This time it will be commercial real estate — shopping malls, strip malls, warehouses, and office buildings. As businesses close and rents decline, the ability to service the mortgages on the over-built commercial real estate disappears.”
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