The distressed loan situation in commercial real estate is taking a striking turn for the worse, according to a CoStar Group analysis of December loan information on more than 83,000 loans in commercial mortgage backed securities.This is a good report by Costar and there are more charts and lots more information in the report by state. The report also highlights a list of the Top 10 Largest Specially Serviced or Delinquent Loans. It's an interesting list that includes a casino, multi-family units, office space, raw land, two hotels, and two retail shopping centers. What more could you ask for? My only complaint is the charts are not very crisp.
The amount of loans placed in special servicing - generally an indication of a delinquency or failure to pay off a mature loan - rose dramatically in the fourth quarter - from about $400 million per month in September to more than $1.6 billion in November.
And that trend is likely to continue in the near term as the number of loans identified by CMBS servicers as having potential credit issues more than doubled from about $3.5 billion per month to about $7.5 billion in November.
In preparation for its first market outlook presented last week, CoStar also undertook its first-ever analysis of delinquent and distressed properties in the CMBS market, examining loans with a total value of more than $700 billion.
CoStar identified nearly 1,200 commercial real estate loans that were either delinquent in loan repayments or had reached maturity without pay off of the loan. The principal and interest outstanding on those loans as of mid December totaled nearly $8.2 billion.
CoStar also compiled a list of nearly 6,100 additional loans that servicers for those securities have flagged as having potential credit concerns. The current scheduled ending balance of those loans totaled $57.8 billion.
Looking at delinquencies by property type, it is also apparent that this is a housing-led recession. Most commercial real estate delinquencies are showing up first in multifamily loans and then loans on retail properties as falling housing values have cut into consumer spending.
Going forward, retail properties continue to show potential credit concern but trouble also appears to be brewing in the office sector as well.
Commercial Real Estate Deteriorates In Most Districts
With a tip of the hat to Calculated Risk the Fed's Beige Book shows that commercial real estate market deteriorated in most Districts and was "grim and depressing" in Boston.
Contacts in the Boston District described the commercial real estate market as grim and depressing, and market conditions continued to deteriorate in Richmond. In the Minneapolis District, a contact noted that the market remained in a downturn that has now lasted more than a year. Commercial real estate transactions in the Dallas District have reportedly ground to a halt. Leasing activity was minimal in the Boston District, continued to fall in the Philadelphia District, and was assessed as ranging from slowing to frozen in the Richmond District. Contacts in the Chicago District reported increases in sublease space. Office and industrial leasing is expected to remain steady through the first half of 2009 in the St. Louis District, but San Francisco reported that conditions in their commercial office market remained exceptionally weak. The New York District reported that Manhattan's office vacancy rate climbed to its highest level in two years. Contacts in the Chicago District noted elevated vacancy rates, and contacts in the Kansas City District expected higher vacancy rates going forward. Contacts in the Atlanta District also anticipate that more commercial space will become available.More Beige Book Highlights
Reports about commercial construction activity also were downbeat. In the Philadelphia District, commercial construction activity continued to fall. Cleveland reported that construction backlogs have declined for some contractors. Commercial contractors in the Atlanta and Chicago Districts reported declines in building activity and noted that more projects were cancelled or postponed. In St. Louis, contacts in commercial and industrial construction predicted a challenging environment in early 2009. San Francisco reported that commercial construction activity was very limited. Construction-related manufacturing contacts in the Dallas District reported that demand from commercial construction is shrinking rapidly.
Overall economic activity continued to weaken across almost all of the Federal Reserve Districts since the previous reporting period.Grim and Depressing describes the entire beige book, at least from the point of view of the Fed.
Consumer Spending
District reports indicate that retail sales were generally weak, particularly during the holiday season. A majority of Districts noted deep discounting during the holiday sales season. Vehicle sales were also weak or down overall in the Districts reporting on them.
Manufacturing and Other Business Activity
Manufacturing activity continued to fall in most Districts since the previous report, with declines reported across a wide range of industries.
Real Estate and Construction
Residential real estate activity continued to weaken in nearly all Districts. The higher-priced housing markets nearest to New York City were characterized as especially weak.
Banking and Finance
Most Districts that reported on lending activity indicated that it continued to decline or remained weak, and many Districts reported that credit conditions remained tight or tightened further. Overall lending activity was reported to have slowed or declined in New York, St. Louis, Kansas City, and Dallas; it remained soft or weak in the Chicago and San Francisco Districts.
Prices
Consumers saw sizable holiday price cuts in retail stores in a majority of the Districts. Retail contacts in the New York, Philadelphia, Atlanta, Chicago, Minneapolis, Kansas City, Dallas, and San Francisco Districts reported heavy holiday discounting. Retailers and restaurant contacts in the Kansas City District lowered prices and anticipated further declines in the months ahead. Lower energy prices were noted throughout many of the Districts.
Boston reported large price decreases for energy, oil-based materials, paper, and cotton in particular. In the Kansas City District, raw materials prices fell sharply, and manufacturers in general reported a corresponding decline in finished product prices. Manufacturers in the Philadelphia District also reported decreases in commodity prices and some reported a reduction in the prices of their own products as well.
Wages
Wage pressures remained largely contained in most Districts. The Cleveland, Chicago, Dallas, and San Francisco Districts reported little to no wage pressures. According to reports from the New York District, year-end bonuses at financial firms are seen falling 20 to 30 percent from a year ago at some of the smaller firms but more substantially at the larger establishments. The Boston, Chicago, and San Francisco Districts also noted that some contacts are enacting or considering pay freezes or reductions in compensation.
The reality is falling wages and prices are a good thing. It might not seem like it, but it's a necessary part of the healing process, as are the bankruptcies and defaults that the Fed is desperately trying to prevent. Malinvestments must be cleared and home prices must drop to affordability levels before there can be any thoughts of a lasting recovery.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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