According to Fitch Ratings Ltd, the pace of commercial real estate foreclosure and default is expected to quicken. The number of late payments and defaults will double, if not triple, by the end of next year.
In the Nouriel Roubini’s interview with Bloomberg’s Carol Massar on November 19, Roubini predicts the current crisis is the worst recession in 50 years, he said:
There’s a major credit crunch, and firms are having a credit crunch. They cannot borrow, households cannot borrow, and the credit crunch has gone from subprime, to near prime, to prime, to commercial real estate, to credit cards, to auto loans, to student loans, to leveraged loans, to corporate bonds. It’s just a massive credit crunch.Roubini has predicted that commercial real estate will be the next shoe to drop in the credit meltdown since July, 2007. You can still read his article of July 12, 2007 here and of November 14, 2007 here.
Home prices have to fall at least another 15%. The cumulative fall in home prices from the peak is going to be at least 40% to bring them back to the historical norm. So this housing recession is just getting worse. People are not buying homes, housing starts are collapsing, building permits are collapsing. It’s a vicious circle, and there’s no bottom to it.
Video courtesy of Bloomberg
On November 17, Fitch reported the commercial real estate market saw a rise in loan delinquencies last month because there are fewer lenders willing and able to refinance mortgages for commercial properties such as malls and office buildings. With the US credit markets frozen that pace of delinquencies is expected to continue to climb in coming months. Via IDD Magazine:
“With CMBS issuance at a standstill and portfolio lenders cautiously managing their balance sheets, borrowers are facing increased difficulty accessing capital to refinance maturing loans,” Fitch said in a prepared statement.
The rating agency added that given the illiquidity in the market, it expects the proportion and dollar balance of maturity defaults to continue to grow at a fast pace with delinquencies approaching close to 75 basis points by the end of this year.
The proportion of non-performing matured loans within the loan delinquency index has increased significantly over last year and particularly has trended upward in recent months. In October 2007, non-performing matured loans made up 16% of new delinquencies and 4% of the overall index. This compares to the 42% of new delinquencies and 15% of the overall index comprised of non-performing matured loans one year later, as of October 2008.
Within its portfolio of rated CMBS transactions, Fitch has identified 274 fixed-rate loans totaling $987.8 million and 29 floating-rate loans totaling $2.4 billion that are scheduled to mature in November or December 2008. All but two of the floating-rate loans have extension options remaining and are likely to extend as performing loans. Although earlier in the year, Fitch expected those fixed-rate loans with high coupons and strong debt service coverage ratios to find financing, even those loans are facing maturity defaults as lending has come close to a halt.
“Timely repayment of maturing loans will continue to be a concern until global economic pressures subside and both lender and investor confidence are restored,” the rating agency warned.
The loan delinquency index measures loans that are at least 60 days delinquent within the universe of all Fitch-rated transactions--475 transactions worth $553.1 billion.
Unlike home mortgages, businesses don’t pay their loans over 30 years. Commercial mortgages are usually written for five, seven or 10 years with big payments due at the end. About $20 billion will be due next year, covering everything from office and condo complexes to hotels and malls.
The retail outlook is particularly bad. Circuit City and Linens ’n Things have sought bankruptcy protection. Home Depot, Sears, Ann Taylor and Foot Locker are closing stores.
Those retailers typically were paying rent that was expected to cover mortgage payments. When those $20 billion in mortgages come due next year — 2010 and 2011 totals are projected to be even higher — many property owners won’t have the money.
The worst-case scenario goes something like this: With banks unwilling to refinance, a shopping center goes into foreclosure. Nobody can buy the mall because banks won’t write mortgages as long as investors won’t purchase them. Credit markets have seized up as People are not willing to take risks and buying nothing.
That drives down investments already on the books. Insurance companies are seeing their stock prices fall on fears they are too invested in commercial mortgages.
ETFs/Stocks :
ProShares UltraShort Real Estate ETF SRS $121.52 +1.93 (+1.61%)Related Posts :
Vornado Realty Trust VNO $53.45 -2.75 (-4.89%)
Simon Property Group, Inc SPG $47.50 -3.45 (-6.77%)
Boston Properties, Inc. BXP $53.40 -1.54 (-2.80%)
Sears Holdings Corporation SHLD $36.25 -0.90 (-2.42%)
Sources :
- Associated Press via MSNBC: New crisis in commercial real estate looms, November 28, 2008 7:42 a.m. ET
- Yahoo! Finance: Fitch Affirms FMC Real Estate CDO 2005-1; Assigns Outlooks, November 18, 12:34 pm ET
- IDD Magazine: Commercial Real Estate Debt Delinquencies Up In October, Fitch Says, November 17, 2008
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