CRE Walk Aways - But to Where?

[don]

The covert bailing out of the commercial real estate industry by the Federal Reserve.

Part of the success that the Federal Reserve has achieved with boosting up large banks stems from its secretive ability to forge shadow bailouts of residential and commercial real estate loans. The more secretive of the previous two comes from the commercial real estate (CRE) industry. During the height of the housing mania in the United States CRE values were estimated to be worth $6.5 trillion. A hefty sum no doubt and with $3.5 trillion in loans securing these properties, a significant cushion of equity was in place. Yet with the crash in all real estate values, banks were left holding a smoldering portfolio of empty shopping malls, luxury hotels, and in some cases fast food outlets. Today CRE values are estimated to be at $3 to $3.5 trillion putting many loans in a negative equity position reminiscent of many individual homeowners. This issue of bailing out CRE was never discussed openly with the American people because it would have never carried any political muster. So what the Federal Reserve accomplished was to create a system where banks were able to exchange toxic loans in place of U.S. Treasuries without taking up an open dialogue with the public. In other words a clandestine bailout.


The continuing shadow bailout



The problem with bailing out the commercial real estate industry is that it shifts costs from businesses and more crucially big banks to working and middle class Americans. The value of money that Americans now carry is becoming worth less each day with these continued actions. Do Americans make the direct connection? I think the Federal Reserve is making the bet that most will not understand this convoluted connection and simply go on with their daily lives blaming whatever other topic of the day is filtering in the financial press. Without a question however the Fed is making Americans poorer. The values of CRE have fallen dramatically and if we look at the current chart of their values, we see that they are making no immediate comeback:


Source: MIT

CRE values are down by 50 percent from their peak only a few years ago and if we are to actually adjust for inflation the figure gets even more dramatic. It is hard to imagine how values can go up. If you built a shopping mall in say an Arizona suburb that never drew the expected traffic, then it is likely the loan will not be serviced and the bank and borrower would be in serious trouble. This has happen thousands of times over across the United States. Most of the CRE troubles are coming online in the next few years:


Source: ZeroHedge

However instead of these loans going into default and becoming issues for banks, these are now on the Federal Reserve balance sheet and will cause problems for taxpayers. In many ways we are already seeing this being reflected through higher commodity and a weaker dollar. As the Fed talks about how open they are and how transparent their accounting is we simply need to look at their overall balance sheet and realize that most of the bailouts are still lingering in their hidden books:


Source: Cleveland Fed

What is interesting is that we are given an overall eagle eye view of their portfolio but we are not given deeper knowledge of what is in that $2.75 trillion portfolio. It would be a big difference between a shopping mall that is fully occupied from one that has zero traffic. In the first case you can get an actual value and it would be worth something. There are many shopping centers and malls built in the mania that really have no value and even serve as a piece of real estate blight in local communities.

One piece of CRE that does not fall in this category is a Ritz hotel:

“(WSJ) The developers of the Ritz-Carlton Highlands hotel at Lake Tahoe apparently have leaned a little too far over their skis. Bank of America Corp., the lead lender in the hotel’s $157 million mortgage, has filed a default notice against the property.

Developer and owner East West Partners, based in Avon, Colo., is “talking daily” with its lenders to resolve the situation, East West senior partner Blake Riva said. At issue: $10 million of the loan has matured without being paid, and the lenders want East West to pitch in another $8 million of capital.

Otherwise, East West and Ritz-Carlton, a unit of Marriott International Inc., say the hotel is doing well. Like many mountain-resort businesses, the Ritz is temporarily closed and slated to reopen by mid-May, after the “mud season” passes and vacationers return to the area on the California-Nevada border.”

I find it fascinating that we are bailing out a place where 99 percent of Americans will never be able to afford yet are using their future earnings in taxpayer dollars to bailout this hotel. As banks talk about the wonderful economic recovery their production of loans tells you another story:



Banks are making fewer loans in the CRE world while pushing more and more of the toxic debt onto the Federal Reserve balance sheet. People need to remember that the Fed is a quais-governmental body that is mainly concerned with protecting the too big to fail banks. From its inception in 1913 this system was never designed for the mom and pop investor or the small town bank. The purpose of the Fed was to protect giant banking interests by consolidating banking power. As the Fed talks about economic success many Americans are asking, “economic success for whom?”

http://www.mybudget360.com/covert-ba...rve/#more-3055

[mmr]

Re: CRE Walk Aways - But to Where?

I'm missing the category on the Fed's balance sheet where the bad CRE loans or real estate bought from banks would reside (with the notable exception of the remaining $75 billion of AIG and Bear Stearns "assets", only a small portion of which are CRE-related). The "toxic" debt on the Fed's balance sheet is mostly government-guaranteed residential mortgage securities and treasury bonds, for which the Treasury Department is on the hook regardless of the owner.

The CRE loans are generally still sitting right on the banks' balance sheets or in the securitizations where they were originally put - the Fed didn't need to bail out the banks by buying the securities, when they could just manipulate interest rates to:

- Cut bank funding costs (e.g., deposit rates)
- Boost equity markets so that banks could raise capital to offset some of the losses
- Try to drive investors and insurance companies back into CRE investment in pursuit of any kind of yield

while instructing bank examiners to exercise forbearance in restructuring CRE loans.

There was / is a CRE bailout, but it's right out there in the open, not buried somewhere on the Fed's balance sheet.

[don]

Re: CRE Walk Aways - But to Where?

more push on the way:

U.S. commercial property prices may fall within a year as building owners attempt to refinance $1 trillion in mortgages, according to Joseph Azrack, head of real estate for Apollo Global Management LLC.

Rents in some cities don’t justify the rising prices being paid and may force owners to give up properties when their loans mature, Azrack said during a panel discussion yesterday at the Milken Institute Global Conference in Beverly Hills, California.

The market is “due for a correction” in the next six to 12 months, Azrack said. “It’s all about refinancing.”

Real estate investors are focused on the least risky assets amid an uneven U.S. economic recovery, bidding up prices in such cities as New York and Washington. Property has shown “less of a crack in prices than I would have expected” as deals for offices, retail centers and other buildings remain on the “low side,” billionaire Warren Buffett said in a May 1 interview.

Green Street Advisors Inc., a real estate research company in Newport Beach, California, said on April 6 that commercial property values increased 4 percent in March from the previous month and 22 percent from a year earlier, while remaining 14 percent from the August 2007 peak. The Moody’s/REAL Commercial Property Price Index shows prices are 45 percent below their peak.

Green Street’s index includes deals that are in negotiation or under contract, while Moody’s tracks completed sales.

Seeking Yield

The price run-up results from global investors needing to place capital as low interest rates reduce yields on other assets, Barry Sternlicht, chairman of Greenwich, Connecticut- based Starwood Capital Group LLC, said during the panel discussion. A record number of private-equity property investors, including Blackstone Group LP (BX), are seeking to raise $160 billion, according to London-based researcher Preqin Ltd.

That doesn’t mean the funds will succeed, Azrack said.

“When everyone is running for core, you should be running away,” Sternlicht said.

The losses at such vehicles as Goldman Sachs Group Inc. (GS)’s Whitehall fund and Morgan Stanley’s real estate funds increases the need for a “margin for safety” in property investing, Sternlicht said.

“We’re not sure how much we’re going to get from our traditional sources,” he said.

http://www.bloomberg.com/news/2011-0...rack-says.html