From owner-doc-jp@jp.FreeBSD.org Mon Nov 16 20:41:22 2009
Received: (from daemon@localhost)
	by castle.jp.FreeBSD.org (8.11.6p2+3.4W/8.11.3) id nAGBfMc15005;
	Mon, 16 Nov 2009 20:41:22 +0900 (JST)
	(envelope-from owner-doc-jp@jp.FreeBSD.org)
Received: from test.com (skellyhome.org [220.231.180.250] (may be forged))
	by castle.jp.FreeBSD.org (8.11.6p2+3.4W/8.11.3) with ESMTP/inet id nAGBf7C14995
	for <doc-jp@jp.freebsd.org>; Mon, 16 Nov 2009 20:41:10 +0900 (JST)
	(envelope-from thebullandbearobserver@gmail.com)
Received: from fls-9e466565812 ([220.231.180.250]) by test.com with MailEnable ESMTP; Sun, 15 Nov 2009 18:59:43 +0800
Message-ID: <4121-2200911015105943343@fls-9e466565812>
To: "A1" <thebullandbearobserver@gmail.com>
From: "The Bull & Bear Observer" <thebullandbearobserver@gmail.com>
MIME-Version: 1.0
Content-type: text/plain; charset=windows-1252
Content-Transfer-Encoding: quoted-printable
Reply-To: doc-jp@jp.FreeBSD.org
Precedence: list
Date: Sun, 15 Nov 2009 18:59:43 +0800
X-Sequence: doc-jp 73938
Subject: [doc-jp 73938] Bull & Bear - Real Estate
Sender: owner-doc-jp@jp.FreeBSD.org
X-Originator: thebullandbearobserver@gmail.com
X-Distribute: distribute version 2.1 (Alpha) patchlevel 24e+060209

John F=2E Kennedy said, =93the time to fix the roof is when the Sun is shi=
ning=94=2E  With the market ignoring the reality on the horizon and contin=
uing to move higher, you  better get your sunglasses and get on that roof=2E=
  This is the time to start getting prepared for the next big thing=2E  I =
have written extensively on commercial real estate and hope you will not i=
gnore the facts before you=2E


by Doug Hornig

=2E=2E=2Ewait until you see what's in the cards for commercial real estate=
=2E

That's right, the next train wreck will be in commercial real estate=2E Co=
uldn't be worse than last year's residential market crash=3F That remains =
to be seen=2E But it's coming soon, probably as early as the second quarte=
r of next year, and there's nothing that can prevent it=2E The government =
will intervene, trying desperately to delay the day of reckoning, and may =
even succeed=2E For a while=2E But make no mistake about it, that train is=
 going off the tracks no matter what=2E

Every part of the sector - from multifamily apartment buildings to retail =
shopping centers, suburban office buildings, industrial facilities, and ho=
tels - has accumulated a huge amount of defaulted or nonperforming paper=2E=
 It's an impossible, swaying structure that cannot long stand=2E

Just ask Andy Miller=2E

Andy is one of the most knowledgeable people around when it comes to comme=
rcial real estate=2E Co-founder of the Miller Fishman Group of Denver, he =
has spent twenty years buying and developing apartment communities, shoppi=
ng centers, office buildings, and warehouses throughout the country=2E He'=
s also worked extensively - especially lately - with asset managers and sp=
ecial servicers (those who handle commercial mortgage-backed securities, o=
r CMBS) from insurance companies, conduits, and the biggest banks in the U=
=2ES=2E, advising them on default scenarios, helping them develop realisti=
c pricing structures, and making hold or sell recommendations=2E

It isn't easy=2E Commercial real estate sales are off a staggering 82% in =
2009, compared with 2008, and last year was worse than '07=2E No one is se=
lling at depressed prices, but it hardly matters as there are no buyers, e=
ither because they're afraid of the market or can't meet more stringent lo=
an requirements=2E Two years ago, the value of all commercial real estate =
in the U=2ES=2E was about $6=2E5 trillion=2E Against that was laid $3-3=2E=
5 trillion in loans=2E The latter figure hasn't changed much=2E But the fo=
rmer has sunk like a bar of lead in the lake, so that now between half and=
 two-thirds of those loans will have to be written down, Andy estimates=2E=


"If the banks had to take that hit all at once, there wouldn't be any bank=
s," he says=2E

And it's actually worse than that=2E As even average citizens became aware=
 during the subprime meltdown, loans in recent years were bundled into exo=
tic financial vehicles that could be sold and resold, a class generically =
known as conduits=2E These commercial mortgage-backed securities, while le=
ss well known than their cousins built upon home loans, are nonetheless ub=
iquitous=2E

Three guesses who were among the significant buyers of CMBS=2E If you said=
 banks, banks, and more banks, you got it=2E Thus these folks are sitting =
not only on their own malperforming loans, but on a whole lot of everyone =
else's toxic junk, too=2E
This is how bad conduits are: A 3% default rate last year jumped to 6% in =
2009 and is expected to double again, to 12%, in 2010=2E An entity that ta=
kes a 12% hit to its portfolio - and this includes countless banks, pensio=
n and annuity funds, international institutional investors, and others - i=
s in deep, deep trouble=2E

The real tsunami is coming, probably in the second quarter of 2010, Andy e=
stimates=2E Because that's when banks will have to start preparing for the=
 wave of mortgages that were written near the market top and are maturing =
in 2011-12=2E Unlike home loans, commercial loans tend to be relatively sh=
ort-term in nature (average 5-7 years), because - outside of apartment bui=
lding loans backed by Fannie or Freddie - there are no government programs=
 to subsidize longer-term ones=2E These guys mature in bunches=2E
According to a recent Deutsche Bank presentation, the delinquency rate on =
commercial loans as of the end of 2Q09 was greater than 4%=2E Of these, th=
ey expect that north of 70% will not qualify for refinancing=2E Imagine wh=
at will happen to the estimated $2 trillion in commercial mortgages that m=
ature between now and 2013=2E

And even that is not the end of it=2E There's a second huge wave on the wa=
y in 2015-16=2E

Problem is, instead of trying to meet this inevitable challenge head on, a=
sset managers have decided to believe in such phantoms as the tooth fairy,=
 honesty at the Fed, and an economic turnaround powerful enough to bail th=
em all out=2E De Nile is not just a river in Egypt=2E

To be fair, it's difficult to envision what an intelligent, aggressive res=
ponse would look like, given the breadth and depth of the crisis, and the =
lack of resources available to deal with it=2E Miller recently met with a =
group of asset managers from a number of different, prominent banks=2E The=
y reported that they're completely overwhelmed and can't even begin to cop=
e with the sheer volume of problem loans on their calendar=2E It's so bad =
that they're now dealing with some borrowers who haven't paid a cent in a =
year and a half=2E

What do you do if, as Andy thinks is the case, 85-90% of the entire commer=
cial real estate market is under water relative to its financing=3F What h=
appens to a property when its value drops way below the loan, a seller can=
't get enough money to get out, a buyer can't raise enough money to get in=
, and the bank can't afford to foreclose=3F Simple=2E It just sits there, =
carried along on the bank's books at some inflated "mark to fantasy" price=
 that makes the institution's balance sheet look passable=2E The industry =
even has a catchphrase for the situation: "A rolling loan gathers no moss=2E=
"

In the case of a retail store, a bankrupt tenant walks away=2E Andy looked=
 at just the part of Phoenix where his firm does business and found 90 vac=
ant big box stores, with an aggregate floor space of 8 million square feet=
=2E If Christmas season is as lackluster as cash-strapped consumers are li=
kely to make it, there will be many others to follow=2E

The hotel business is terrible=2E Overbuilding based upon travelers who we=
nt into debt to finance lavish vacations is taking its toll on tourist des=
tinations=2E At the same time, business travel has seriously contracted=2E=
 Flights into Las Vegas, which caters to both, have been slashed so much t=
hat even if every seat on every remaining flight were filled and visitors =
stayed for an average number of days, the hotels still couldn't break even=
=2E In industry parlance, banks are now engaged in "extend and pretend," i=
=2Ee=2E, giving hotels three- to six-month loan extensions in the hope tha=
t things will somehow improve in the near future=2E

Office space is doing okay in central business districts, but not faring w=
ell elsewhere=2E Some estimates tab the national office vacancy rate at ov=
er 16=2E5%, compared with 12=2E6% in January 2008=2E It exceeds 20% in par=
ts of Atlanta and San Diego, and in many places in between=2E

Multifamily apartment buildings - and the very creaky Fannie and Freddie a=
re carrying a load of them - may be the next to topple=2E As values deteri=
orate and landlords are faced with loans coming due, there is no incentive=
 to fix whatever goes wrong=2E If, for example, you have a $10 million loa=
n maturing in two years, and the property value has declined to $6 million=
, why would you spend half a million to fix leaky roofs=3F The question an=
swers itself=2E Yet, as capital spending needs are not attended to, the ap=
artments deteriorate=2E Which leads to working-class tenants replaced by m=
eth labs=2E Which leads to even lower property values=2E And so on=2E In t=
he end, when the banks are forced to take possession, they will be left wi=
th either expensive repair jobs, or the cost of demolition and a total wri=
te-off=2E

As the overall commercial real estate crisis escalates, the banks will do =
the same thing they did last year: run to the government, palms outstretch=
ed=2E

How will Washington respond=3F Good question=2E On the one hand, further b=
ailouts will further infuriate the public=2E But on the other, the politic=
al sentiment will be that allowing the banks to fail will have even more d=
ire consequences=2E

The Fed has already tried to let some of the relentlessly building pressur=
e out of the balloon through TALF (Term Asset-Backed Securities Loan Facil=
ity)=2E But that hasn't worked, because TALF only backs the most senior, c=
reditworthy bonds in a CMBS pool=2E Those aren't the problem=2E The proble=
m is the junior notes no one wants=2E

In order to increase market liquidity and get conduits moving again, the g=
overnment will likely be forced to create a guarantee program similar to t=
he FHA, Miller thinks, whereby short-term money (on the order of 5-7 years=
) is made available=2E Will that just push our problems five to seven year=
s down the road=3F Quite possibly=2E But what is being purchased is time, =
the only thing left to buy=2E The hope, of course, is that it's enough tim=
e - for the real estate market to stabilize, prices to return to more "nor=
mal" levels, and the world to turn all hunky dory=2E

Rock, meet hard place=2E Let all the troubled banks fail, and the conseque=
nces will range from some excruciating but short-term pain, to a plunge in=
to full-bore depression=2E Prop them up with yet more newly printed fiat m=
oney, and anything from high to hyperinflation will inevitably result, alo=
ng with the possibility of extending the problem well into the next decade=
=2E

Both are frightening prospects=2E We don't want either, but realistically,=
 we're going to get one or the other=2E Let's be clear, it won't be the en=
d of the world=2E However, it will be the end of the world as we know it=2E=
 That makes it imperative to prepare for the new one that's coming=2E




If you are not interested in receiving these emails, simply click the link=
 below and type the address you want to be removed from our database=2E =20=


http://thebullandbearobserver=2Ecom/remove/index=2Ephp=3Femail=3D

(Please allow us up to 10 days to process your request=2E)


