Tuesday, January 6, 2009

New York Times: As Vacant Office Space Grows, So Does Lenders' Crisis

Normally I'd be worried about this type of story and offer dire warnings that I've been repeating for a long time. I'd fill you with holiday cheer about how retail outlets you know will go bankrupt, one off mom and pop shops you never heard of would go under, and strip malls across Americana will be sitting 30-70% empty in about 12-15 months. How shrinking small businesses who once sat in office building suites will go under and leave half empty floors in building across building. However, President Elect Midas shall magically fill 80% of all empty office space by transforming a nation of service workers into shovel diggers and Caterpillar machine workers. (and solar panel installers and school retrofitters - whatever that is) How that fills office space, I don't know - but work with me here. It's a thesis. (need I remind you this all shall happen "in 6 months" when the US economy returns to "good times") The other 20% of office space that Obama does not fix with his healing hand? That's what the next bailouts are for [Dec 22: Wall Street Journal - Property Developers Ask for Government Bailouts]

Again, I'd like to reiterate I like this Obama guy - I just think by this summer or fall, when people who expect the man to part the seas with his magic wand get disappointed, he is going to unfairly lose his honeymoon. But until then, let's clap in glee - shall we?
  • Vacancy rates in office buildings exceed 10 percent in virtually every major city in the country and are rising rapidly, a sign of economic distress that could lead to yet another wave of problems for troubled lenders.
  • With job cuts rampant and businesses retrenching, more empty space is expected from New York to Chicago to Los Angeles in the coming year. Rental income would then decline and property values would slide further. The Urban Land Institute predicts 2009 will be the worst year for the commercial real estate market “since the wrenching 1991-1992 industry depression.” (is that the worst year pre or post bailout?)
  • Rising vacancy rates were expected in Orange County, Calif., a center of the subprime mortgage crisis, and New York, where the now shrinking financial industry dominates office space. But vacancies are also suddenly climbing in Houston and Dallas, which had been shielded from the economic downturn until recently by skyrocketing oil prices and expanding energy businesses. In Chicago, brokers say demand has dried up just as new office towers are nearing completion. (strange for an economy that should be recovering "by the 2nd half of 2009")
  • There is no relief in sight for Orange County, where subprime lenders and title companies once dominated the market but are now shedding space because their business has dried up, and big banks are now shrinking because of a wave of mergers. The vacancy rate has soared from 7 percent at the end of 2006 to 18 percent, a rate that the Tampa area should match this month, local real estate brokers say. (welcome to the morass Tampa! Good to see you hear - Obama should be stopping by any day now, just remain patient)
  • In New York, where rents had risen the highest as financial companies gobbled up office space, vacancy rates are floating above 10 percent for the first time in years.
  • What looked like the worst possible case a few weeks ago for Chicago now appears to be the most likely outcome, said Bill Rogers, a managing director at Jones Lang LaSalle, a real estate broker. The vacancy rate, which was fairly stable at 10 percent, is now rising quickly and could hit 17 percent in 2009, he said.
  • Newmark Knight Frank, a real estate broker, expects the vacancy rate in Dallas to rise to 19 percent this year, from 16.3 percent. Houston....the vacancy rate is 11 percent and rising.
  • ....But many building owners, while struggling with more vacancies and less rental income, will need to refinance commercial mortgages this year. The persistent chill in lending from banks to the credit markets will make that difficult — even for borrowers who are current on their payments — setting the stage for loan defaults.
  • The prospect bodes ill for banks, along with pension funds, insurance companies, hedge funds and others holding the loans or pieces of them that were packaged and sold as securities.
  • Stock analysts say commercial real estate is the next ticking time bomb for banks, which have already received hundreds of billions of dollars in capital and other assistance from the federal government. Big banks — like Bank of America, JPMorgan Chase and Morgan Stanley each hold tens of billions of dollars in commercial real estate securities. The banks also invested directly in properties. (not to worry, we can bail out both the commercial property developers AND banks, and everything is covered by Uncle Sam and Uncle Ben - stop all this fussing about nothing - the nanny state will fix it. We need more commercial mortgage loans on our Federal Reserve balance sheet as we build out a more "balanced" portfolio)
  • Regional banks may be an even bigger concern. In the last decade, they barreled their way into commercial real estate lending after being elbowed out of the credit card and consumer mortgage business by national players. The proportion of their lending that is in commercial real estate has nearly doubled in the last six years, according to government data. (not to worry, this will be taken care of by TARP 4.0) Just as home loans were pooled, then carved up and sold to investors as securities over the last two decades, commercial property loans were repackaged for the financial markets. In 2006 and 2007, nearly 60 percent of commercial property loans were turned into securities. (heading to the Federal Reserve balance sheet near you)
  • Effective rents, after free rent and other landlord concessions, have already started to fall and are expected to decline 30 percent or more across the country from the euphoric days of the real estate boom, according to real estate brokers and analysts. (so supply and demand still works? Need to stop that right quick! Someone call Geithner and Summers - this must be stopped!) That is making it all the more difficult for owners, who projected ever-rising rents (sort of like projecting ever rising home values - whomever creates these models really needs to be exposed to "the real world") when they financed their office buildings, hotels, shopping centers and other commercial property. Owners typically pay only the interest on loans of 5, 7 or 10 years and refinance the big principal payments necessary when the loans come due.
  • Among commercial properties, the most troubled have been hotels and shopping centers, [Nov 27: AP - Malls, Hotels Next Victims in New Mortgage Crisis] where anemic sales and bankruptcies by retailers are leading to more vacancies and where heavily leveraged mall operators, like General Growth Properties and Centro, are under intense pressure to sell assets. But analysts are increasingly worried about the office market.
  • The Real Estate Roundtable sees a rising risk of default and foreclosure on an estimated $400 billion in commercial mortgages that come due this year. (bailout! bailout! bailout!) Already, $107 billion worth of office towers, shopping centers and hotels are in some form of distress, ranging from mortgage delinquency to foreclosure
  • Most loans, he said, were made at 50 percent to 70 percent of property values. At the top of the market in 2006 and 2007, though, some owners took advantage of available credit and borrowed 90 percent or more of the value of a property, a strategy that works only in a rising market. Since then, property values have dropped 20 percent, Mr. DeBoer said. (wow sounds vaguely familiar - what other market did we see this in... hmmm... anyhow, I believe we should bailout those who engage in risky behavior and immense leverage- it's the right thing to do and my unborn grandchildren are sending me messages that they are cool with it.)
So along with too many restaurants, retail outlets, homes, strip malls... we can add office buildings. Perhaps with every 4% mortgage we hand out we can throw in 1500 square feet of prime office space to sweeten the deal. If you're subprime - even better - along with your 0% GMAC 5 year auto loan - you get 2500 sq feet... please... just BORROW! Uncle Sam demands it.

Look folks, I don't have any fancy schmancy models and I'm sure the 28 year old guy straight out of one of our best business schools - who made this "model" that apparently every Wall Street firm and commercial property developer used - was incredibly smart (but he was hit with a Black Swan event). Yet somehow I could see this quite a few moons ago - I have a super secret model I call "thinking" (no Excel sheet required)... but then again, unlike most parts of our government I still believe in the business cycle. The 28 year old guy's "model" (and Greenspan's Federal Reserve) apparently does not.

[Mar 4, 2008: WSJ - Building Slowdown Goes Commercial]

Disclaimer: The opinions listed on this blog are for educational purpose only. You should do your own research before making any decisions.
This blog, its affiliates, partners or authors are not responsible or liable for any misstatements and/or losses you might sustain from the content provided.

Copyright @2012 FundMyMutualFund.com