As was pointed out yesterday, Morgan Stanley's massive Real Estate empire is starting to unravel building by building. With a building here, five buildings there, the shareholder pain, and the writedowns start accumulating. But it was not always makeshift tears and walking away from buidings when your equity is underwater. In those long ago days of 2005 it was hope and bubblemania. Which is why we dug up various Morgan Stanley Real Estate Fund documents and materials, exposing the firm's delirium just as the peak in the real estate bubble was about to set in.
At least a few MDs at Morgan Stanley DO read my blog, but it is obvious that the guys in the real estate division don't. Early in 2008 I named Morgan Stanley the "The Riskiest Bank on the Street". The following is one of the reasons why.
Continuing our series of impending Commercial Real Estate debacles, today we focus on CMBX 3 (H1 2007 transactions). As Fitch disclosed on Friday, the November delinquency rate across CMBS increased by 43 bps to 4.29%, while more than double, 9.16% of the entire Fitch universe, was in special servicing. Of this CMBX 3 (together with 4) hold the brunt of the collapse in CRE. Of the 25 deals in CMBX 3, those performing the worst as of the latest remittance report were:
- COMM 06-C8, with 18.3% of all deals delinquent or in special servicing ($680.4 million of $3.7 billion total)
- CSMC 07-C1, with 16.5% of all deals delinquent or in special servicing ($552.3 million of $3.3 billion total)
- LBUBS 07-C1, with 15.6% of all deals delinquent or in special servicing(576.4 million of $3.7 billion total)
And highlighted below are the properties most indicative of the CRE collapse within CMBX 3, and in CRE in general. Once again, this is merely a sample with many other properties already in foreclosure and/or delinquency.
Remember the deal which to much fanfare, lots of subsequent Merrill upgrades, and endless boasting by SL Green CEO Marc Holliday was supposed to usher in the second golden age for New York Commercial Real Estate? The deal that was the alleged steal of 485 Lex by a bunch of shady investors which we wrote about first 4 months ago. The deal that SL Green CEO, Marc Holliday said "is a first, but significant step
towards the sale of interests in 485 Lexington Avenue. If ultimately
approved, the transaction would demonstrate that the Midtown Manhattan
office market continues to stand as one of the world's top locations
and that investor interest is once again on the rise." Remember now? Ok. That deal just died. And with it died any hope that the "Midtown Manhattan office market continues to stand as one of the world's top locations," that REITs fairly priced, and that Bill Ackman's recent REIT book talking tour is anything but.
Everyone is now well aware of the plight of Stuy Town, which has become a set fixture on the front page of the daily press, and is expected to default on its underlying borrowings within a few months at the most. What will happen to the controlling equity, and the tenants at the multiapartment complex, is unknown. It is no surprise that this will be yet another epic failure for the existing owner, Tishman Speyer, which after gobbling up property after property at the peak of the housing market, is all too aware that it is only a matter of time before control is wrested from it not only in the case of Stuy Town but many of its other properties.
And even though everyone "knows" the state of commercial real estate is in free fall, few have been able to pin it down to specific buildings, as property-level data is still very expensive and more often than not, proprietary. In order to bring the full degree of CRE collapse closer to home, and to provide some leads to our MSM-originating readers, we present a detailed analysis of some of the most impacted CRE properties that have yet to make headline news. For that purpose we combed through BarCap's CMBS remittance data for CMBX 4 (2007 vintage), which is broadly considered the peak year for commercial real estate deals and also the very peak of the housing bubble. We expected to find some of the juiciest CRE failures to be in this loan set. We were not disappointed.
I don't know if it has been officially declared here or not, so I will say it explicitly. Since Wall Street DOES NOT charge for their research, it is essentially a loss leader for sales. We all know this, yet we pretend that it does not happen. Well, it does. It's pervasive. It's explicit. It's now! The goal of Wall Street research is not to enrich the retail or institutional brokerage client, but to pave the way for the underwriting, sales and trading departments. Go ahead. Prove me wrong. I dare 'ya.
I know you have heard a lot of negative stuff about commercial real estate, but most of it was after the fact, and the new stuff just doesn't seem to convey the gist of how far underwater many players actually are - or will be...
CRE is possibly the single biggest experiment in "extend and pretend" currently evolving (aside from the US economy itself, which like a drug addict, is fed its daily methadone of fiat money by its enablers Bernanke and Geithner) in America. This is confirmed by the latest Korpacz Real Estate Q3 Investor Survey: far from pig lipsticking in tried and true CNBC fashion, the report tells it how it is. The biggest victim of the ultimate CRE unwind will be all those REITs which for whatever reason are trading at almost bubble levels (SPG at $74 makes about as much sense as AMZN at $130). Dear REITs: 2012 is approaching rapidly and you still have half a trillion in equity you need to raise. Simon Property, as much as it wishes to emulate Goldman's success in the real estate arena, can not bankrupt then acquire all REIT firesale prices. Of course, when the tide of sentiment on REITs turns, it will be short and sweet: straight to zero, do not pass go, do not collect TARP, due to the value burned by these companies by not being in bankruptcy already.
Mack-Cali Chairman: "Commercial Real Estate Is Somewhere Between An Orderly Massacre And A Disaster"Submitted by Tyler Durden on 11/11/2009 11:16 -0400
The CRE crisis will hit a pinnacle when $500-700 billion of re-equitization becomes needed in a few years. Where that equity will come from is unknown as the US will need a lot of foreign investors to achieve this equity bubble reflation, and they are not there due to a foreigner-unfriendly investment regime.
The recent bear rally has driven most of the solvent, semi-solvent and absolutely insolvent CRE stocks up, quite a few approaching 100%, while their macro outlook has deteriorated significantly, along with their fundamentals. Quite a few have actually acted in cahoots with the banks that held their increasingly worthless debt, having issued secondary offerings basically converting the bank holdings of debt that didn't have an icicles chance in the hottest portion of Hell of getting repaid, into worthless toilet paper, heretofore marketed as stock certificates. They have also begun offering this used toilet paper as dividends. If this isn't the sector screaming for me to come back and short it, I don't know what is.
In what could have been the biggest piece of news today, yet making little headway into the media, the Fed announced that it is adopting a policy statement supporting "prudent commercial real estate loan workouts." And even though in traditional Fed fashion, the statement says a lot but is even more vague, some of the implications from a more nuanced read have very serious adverse implications for commercial real estate.
In what would could pass for Cohen & Steers' worst nightmare, Wilbur Ross today said that he anticipates essentially an Armageddon for US commercial real estate. What we fail to see is how this is news... What we fail to see even more is how the hell REITs are still trading where they are? It must be all those non-cash dividends, the staggering debt loads and the exploding cap rates which make them such an attractive proposition. As Ross points out: "All of the components of real estate value are going in the wrong direction simultaneously. Occupancy rates are going down. Rent rates are going down and the capitalization rate -- the return that investors are demanding to buy a property -- are going up." Which begs the question: just because everyone knows the potential fall out associated with CRE, yet no proactive steps are taken to moderate these adverse developments, save a hope that the Fed will inflate debt sufficiently before 2012 when the refi crunch hits in earnest, does this make REITs a strong buy as BAC/ML has been claiming for months on end?
Here I show a direct comparison of my "on the street, grass roots" and "spreadsheet" observations to that of what is portrayed in the media. Let me know if you see any discrepancies...
How much money was lost in RE this morning in my neighborhood? At least $50mm. A very sad and troubling real estate deal has proved to be a wake up call.
If You Believe All The Negative Hype About Commercial Real Estate, I've Got A Few Thousand Vacant Office Buildings To Sell YouSubmitted by Benjamin N. Dover III on 09/04/2009 00:28 -0400
That gasping sound you hear coming from the commercial real estate market just means it's alive and kicking.