Friday, March 27, 2009

Impending Wave of Commercial Foreclosures

Several of today's news feeds argue that Obama's stimulus will not "fend off" the impending wave of commercial foreclosures but only help to get the banks lending again.

"This isn't designed to head off foreclosures," said Thomas Barrack Jr, head of real estate private equity firm Colony Capital, which has $36 billion of assets under management. "This is designed to start the banks lending."

The U.S. commercial real estate boom that started around 2004 and peaked in 2007 was fueled by cheap debt. Banks and other lenders were often willing to lend up to 90 percent or more of the purchase price. The loans often assumed optimistic rent growth and rising occupancies in the future.

Some analysts (including billionaire, George Soros) think the price declines could hit 30-40% and worse than the 1990’s, with rent levels and vacancies hitting levels from the early 1990’s.

"The problem with the foreclosures is that anyone with any real estate today may own it at less than 50 percent of the value that it was two years ago," Barrack said. "That problem isn't going to go away."

The delinquency rate among CMBS loans, which hit 1.8 percent in March, could rise to 3.5 percent by the end of the year, and 6 percent next year. CMBS loans comprise about 20 percent of the outstanding U.S. commercial real estate loans.

But what happens when the stimulus hits after our period of deflation, and we begin to leverage that printed money.. an explosion of inflation..

“In order to make up for the collapse of credit, we are effectively creating money,” Soros said. “If and when credit is restarted, you would then have an incredibly swollen monetary base, which, if it were leveraged, you would have an explosion of inflation.”

“Right now we are in a period of deflation, but it could easily tip over, where you are facing inflation,” Soros said. “You are then faced with the prospect of draining money supply as fast as credit is created.”

Some large projects around the country (in typically growing, recession proof locations such as Los Angeles and Las Vegas) are fending off creditor calls with bankruptcy ahead of the predictable inflation balloon.

Las Vegas, a city known for its elaborate multibillion-dollar resorts, is already reeling. Echelon, a $4.8 billion resort project on the Las Vegas Strip, was shuttered last year after its parent, Boyd Gaming Corp., and partner Morgans Hotel Group struggled to finance the project. A Las Vegas Sands Corp. condo tower sits unfinished after the casino operator decided to concentrate on finishing other projects. Several projects were canceled before work even started.

Meruelo Maddux Properties Inc., the biggest private landowner in downtown Los Angeles, is filing for bankruptcy protection after experiencing cash shortfalls because of the credit crunch and real estate downturn, the company said.


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