Commercial Real Estate is Pretty Much Doing What We Expected It To Do, Returning to Reality

Moody’s has released data that shows CRE has fallen for a second
straight month. Thus far, things are rolling along exactly as we
anticipated in our 
CRE 2010 Overview (2.85 MB 2009-12-16 07:52:36),
available for free download.

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options from your profile.

You can view the full report here: Moody’s/REAL
Commercial Property Price Indices, May 2010.

For those into CRE, outside of our consulting abilities (
CRE Consulting Capabilities (655.48 kB 2009-12-17 14:17:01),
subscribers can access a bevy of  CRE related forensic valuation
reports on individual REITs and developers, the macro scene and the
performance of prominent industry investors through our download service.

Non-subscribers should click here for recent content in the commercial real
estate space. You’ll notice a lot of funny stuff going on in CRE if
you just look past that pretty glossy cover in the front of the annual
report (feel free to click the links if you want to dig in deeper)…

Reference the truth: CRE
2010 Overview (2.85 MB 2009-12-16 07:52:36),

1. rents are dropping rapidly;
2. CRE values are collapsing;
3. CAP rates are exploding;
4. the refinancing market is looking for much lower LTVs while the
   property values of recently purchased properties are dropping
   simultaneously,
5. and an often overlooked occurrence – REITs are selling off the more
   valuable assets to fund the gaps necessary to rollover overpriced
   debt, further reducing rent rolls and dramatically reducing the
   overall value of the existing portfolios.

These five ingredients combine to make a
deadly elixir. Click any of the charts below to enlarge…

The truth as applied to certain REITS

the truth as applied to REIT holdings…

The
results of these activities have been congealed in our analysis of
Macerich’s entire portfolio of properties (118+ properties), including
wholly owned, joint ventures, new developments, unconsolidated and
off balance sheet properties. Below is an excerpt of the full analysis
that I am including in the updated Macerich forensic analysis. This
sampling illustrates the damage done to equity upon the bursting of an
credit binging bubble. Click any chart to enlarge (you may need to
click the graphic again with your mouse to enlarge further).

Notice the loan to value ratios of the
properties acquired between 2002 and 2007. What you see is the result
of the CMBS bubble, with LTVs as high as 158%. At least 17 of the
properties listed above with LTV’s above 100% should (and probably
will, in due time) be totally written off, for they have significant
negative equity. We are talking about wiping out properties with
an acquisition cost of nearly $3 BILLION, and we are just
getting started for this ia very small sampling of the property
analysis. There are dozens of additional properties with LTVs
considerably above the high watermark for feasible refinancing, thus
implying significant equity infusions needed to rollover debt and/or
highly punitive refinancing rates.

and the Truth as Wall Street Sees it…

Wall
Street Real Estate Funds Lose Between 61% to 98% for Their Investors
as They Rake in Fees!

A hypothetical example easily illustrates
how the financial structure of a typical real estate fund is so
tilted to the advantage of the fund sponsor as to be analogous to a
cost-free “Call Option” on the real estate market.

The example below illustrates the impact
of change in the value of real estate investments on the returns of
the various stakeholders – lenders, investors (LPs) and fund sponsor
(GP), for a real estate fund with an initial investment of $9 billion,
60% leverage and a life of 6 years. The model used to generate this
example is freely available for download to prospective Reggie
Middleton, LLC clients and BoomBustBlog subscribers by clicking here: Real estate fund illustration.
All are invited to run your own scenario analysis using your
individual circumstances and metrics.

Anybody who is wondering who these
investors are who are getting shafted should look no further than
grandma and her pension fund or your local endowment funds…

Comments

[Henry Chinaski]

CRE should have come back down to 2002-2003 levels.  As shown in your chart, it looks more more like 2000-2001.  With all of the government intervention, it looks like the ultimate CRE correction will be off the chart (late 1990s).

Banks are dumping performing loans that no longer conform due to dropping appraised values.  This is killing some investors who might otherwise ride out the storm.

There are signs that things are bottoming out; cap rates stabilizing...  However,with everything else wrong with the stock markets, soveriegn defaults looming, and govt intervetions, etc, all bets are off.

[Paul Bogdanich]

"Anybody who is wondering who these investors are who are getting shafted should look no further than grandma and her pension fund or your local endowment funds"

And therein lies the criminality.  On a broader front the wheels are about to come off.  The propaganda systems are failing.  They have been doing with the economy, uneployment, bank "reform and the oil spill.  However, reality, cruel and magnificient as it is, is really ganging up on them this time.  Unlike lying about Vietnam or Iran or Gaza where Americans do not have any day to day experience to contradict the propaganda all these current events are domestic.  The propaganda system is failing.  It won't last through November.  Too much easily available evidence to the contrary.   

[downrodeo]

Here's to hoping...