Monday, December 22, 2008

Wall Street Journal: Property Developers Ask for Government Bailouts

Unbelievable. This story just goes to show you why this market is unmanageable - the rules change every week and the government supersedes everything. My entire thesis for the year ahead is that the US government would not allow any major financials to go under but they would allow the free market to play out in commercial real estate. It looks like that assumption could be under threat. If things like this start happening, this is truly heading to full socialism.

And in a cynical note, we see why the REITs were so strong of late - information is so leaky on Wall Street, the smaller guy will always be the last to know. Honestly if this goes through there is no reason to short anything ever again since everything is protected from failure. We simply will not be allowed to have a business cycle anymore.
  • With a record amount of commercial real-estate debt coming due, some of the country's biggest property developers have become the latest to go hat-in-hand to the government for assistance.
  • They're warning policymakers that thousands of office complexes, hotels, shopping centers and other commercial buildings are headed into defaults, foreclosures and bankruptcies. The reason: according to research firm Foresight Analytics LCC, $530 billion of commercial mortgages will be coming due for refinancing in the next three years -- with about $160 billion maturing in the next year. Credit, meanwhile, is practically nonexistent and cash flows from commercial property are siphoning off.
  • Unlike home loans, which borrowers repay after a set period of time, commercial mortgages usually are underwritten for five, seven or 10 years with big payments due at the end. At that point, they typically need to be refinanced. A borrower's inability to refinance could force it to give up the property to the lender.
  • A recent letter sent to Treasury Secretary Henry Paulson, and signed by a dozen real-estate trade groups, painted a bleak scenario: "Right now, we believe there is insufficient systemic capacity to refinance expiring, performing commercial real-estate loans," said the letter. "For many borrowers, [credit] simply is not available," the letter noted.
  • To head off some of the impending pain, the industry is asking to be included in a new $200 billion loan program initially created by the government to salvage the market for car loans, student loans and credit-card debt. This money is intended to go directly to help investors finance purchases of securities backed by these assets. If commercial real estate is included, banks might have an incentive to make more loans to developers since they'd be able to repackage and sell them more easily to investors with the assurance of government backing.
  • As part of their lobbying efforts, some industry representatives have asked lawmakers to explore the idea of setting up a separate program aimed at boosting lending to commercial real estate only. (there go those lobbyists, the backbone of Cramerica)
  • The real-estate executives are warning that the approaching surge in commercial mortgages coming due poses another major threat to the global financial system, which already is on life support. With rent prices falling and vacancies rising due to the weakening economy, delinquencies on commercial mortgages already have begun to rise sharply.
  • Real-estate owners are pressing the government to take preemptive action before thousands of properties begin to fail. Among those who have been active in the lobbying effort: William Rudin, whose family is a large Manhattan office-building owner, Stephen Ross, chief executive of The Related Cos., a major U.S. developer, and Steven Roth, chief executive of office and retail landlord Vornado Realty Trust. In recent weeks, industry representatives have met with officials in the Treasury Department, Senate Majority Leader Harry Reid, senior lieutenants of Federal Deposit Insurance Corp. Chairwoman Sheila Bair, members of President-elect Barack Obama's transition team, and Sen. Charles Schumer (D., N.Y.). (and we know why Schumer is meeting with them - how many hours after the meeting did the contributions come pouring in? I'll set the over/under at 18 hours)
  • Treasury and Fed officials have said they would consider including commercial real-estate in the new $200 billion loan initiative. But such a step won't happen soon. The program is not likely to be operational until February. Even then, expanding it to include the immense commercial real estate market would likely require additional financial support from the Treasury. (well the way I read this is, it's happening but not until a "new program" is in place - which in this day and age can be announced any week now)
  • While commercial real-estate developers restrained themselves during the boom years when it came to speculative development, property investors bid up the prices of office buildings, malls and other projects to record levels assuming rents and occupancies would keep rising. With cash flows now falling, a growing number of developers are having a tough time repaying their debt. In cases where owners need to sell buildings to satisfy loans, the current environment makes that difficult. A revitalized lending climate is necessary, they say, to keep them afloat.
  • Some analysts predict the delinquency rate will leap to 2% by the end of next year. During the real-estate collapse of the early 1990s, the worst-performing commercial mortgages -- those that were made in 1986 -- sustained losses of about 10%. (So the projection is for 1/5th the delinquency rate of 1986, yet we need a bailout. But somehow the economy survived in 2006, at 5x the delinquency rate. Give me a break)
How can you place any positions in this market? You simply can't - you wake up to a whole new world and everything can be immediately upside down.

A general sense of disgust

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