CRE

GGP part deux, as the hopium high sold by US regulators that allowed banks and borrowers to pretend bad loans were good wears off and reality sets in..

So, who're you gonna believe, your NYC broker or your lyin' eyes???? Another Reggie Middleton "I told 'ya so" exclusive...

This is very likely the time to be fearful when others are greedy.

Lately, Bain founder and GOP presidential candidate Mitt Romney has found himself in a spirited defense of the private equity industry, doing all he can to spin decades of data which confirm, without failure, that PE Leveraged Buy Outs are nothing but "efficiency maximizing" transactions whose only goal is the "maximization" of EBITDA in the pursuit of dividend recap deals, IPOs or outright sales, while loading up the company with untenable amounts of leverage. All this with a 3-5 year investment horizon, which ignores the long-term viability of a company and seeks to streamline (read fire as many as possible) operations as quickly as possible in the goal of maximizing short-term returns. We wish him luck in his endeavor. As for the other side of the equation, we recreate a post we penned back in November 2009 which analyzes just how effective the mega-LBOs have been for the economy, and the workers involved. In other words - the facts. In a nutshell, here they are: "The Disastrous Performance Of Private Equity: Of The Top 10 LBOs, 6 Are In Distress, 4 Have Defaulted." Read on for the full details.

The iconoclastic outcast being called in to shake things up a little. I'll appear on CNBC @2:30 with my outlook for 2012. I'm not shy about my track record & here's what I'll have to say.

What are the chances rate volatility, excess supply from a burst bubble and insolvent banks causes a CRE crash on both sides of the Atlantic? Yeah, if only all test questios were that easy...

The problem that nobody is talking about, yet everyone continues keeping a close eye on, namely the trillions in commercial real estate under water, is quietly starting to reemerge. In the attached letter from the Commercial Real Estate lobby, it reminds politicians that the hundreds of billions in loans that mature in the next several years won't roll on their own, and we see the first inkling of the lobby asking congress for much more taxpayer aid, in this case in the form of Shelley Berkley's proposed legislation to "enable banks to convert troubled loans into performing assets through modest tax incentives to attract new equity capital to existing commercial real estate projects." The letter tacitly reminds that there are thousands of regional banks whose balance sheets are chock full with underwater commercial real estate (and for the direct impact of this simply observe the 100+ banks on the FDIC's 2010 failed bank list). So in case taxpayers are wondering where the next fiscal stimulus will end up going, wonder no more: "The new investments would be specifically used to pay down debt,
resulting in lower loan-to-value ratios of existing loans as well as
improved debt coverage ratios." As the CRE lobby concludes: "By giving lenders the ability to responsibly refinance debt and
rebalance capital reserve levels, the CRE Act will provide the
opportunity for additional lending capacity that will help stimulate
lending to small businesses, job formation and economic growth in
communities across the country." In other words, it is time for taxpayers to help purge banks of existing toxic debt, so that these same banks can resume lending like drunken sailors, in unviable commercial real estate projects just to guarantee that the next major market blow up also destroys the regional banking system, in addition to the TBTFs.

Many people have asked me how SRS and REITs share prices can defy gravity the way they have given the abysmal state of commercial real estate (CRE). Well my opinion is that the equity and the debt markets have allowed agent and principal manipulation to the extent that it materially distorts and interferes with the market pricing mechanism.

Lenders are just starting to face up to their bad CRE loans and the decline in CRE values doesn't look encouraging for debt that will roll over from now until 2013. Investors are starting to pick at the market, but can they provide a floor?

The Moody’s/REAL All Property Type Aggregate Index measured a 0.5% price decline in March, marking a second month of falling values after a slight rebound reported earlier this year. The index now stands at 111.16, down 24.9% from a year ago and 40.5% from two years ago. Prices peaked in October 2007, and at their lowest point thus far in the downturn (October 2009) they had fallen 43.7%. As of the end of March, commercial property prices are down 42.1% from the peak.

Taubman's Q4 results were as to be expected, despite the rather upbeat spin that was attached to the announcement. This is essentially a barometer for the CRE industry...

The latest casualty of New York's resurgent (not) commercial real estate market is rap mogul Jay-Z, who had previously guaranteed a $52 million loan for a Chelsea hotel, which subsequently has defaulted and is holding the artist as the responsible party for accrued interest. As a result, Jay-Z is lashing out, and in turn is suing defunct hedge fund Highland Capital (maybe he should have at least picked an adversary that can pay him), which last time we checked was still trying to offload second-lien debt at par plus. Bloomberg reports: "Carter, in his complaint filed yesterday in federal court in New York, claims Highland and co-defendant NexBank SSB are attempting to “bleed” from him funds in excess of those he and two other men pledged to pay when they guaranteed the non- principal obligations of a company planning to build a hotel in Manhattan’s west side neighborhood of Chelsea."

Even as ever more Congressmen express concern about the implications of the ongoing CRE "bubble" (yes, this is a quote), S&P comes out with a report noting that should the banking system be forced to take all appropriate CRE-associated writedowns, it likely would not survive. And all this is occurring as REITs probe new 52 week highs. Welcome to the new economy.

Ackman from Pershing Square fame has released a very bullish CRE presentation. I stand diametrically opposed to both the conclusions and the analysis in general, thus have created my own comprehensive CRE outlook for 2010 and beyond. Here you have it: A bulls vs bears debate in the CRE space - both of which are quite well documented and allow for rich reading.

Yet one more nail in the CRE coffin, and another reason why extend and pretend will be with us for years to come, lest investors wake up and find out just how screwed this country's economy really is. In the meantime, IYR is going to the moon. A new McKinsey study looks at the CRE lending industry and finds some very disturbing things. Such as that even in the peak market years of 2006-2007 the European CRE finance industry did not cover its cost of capital!!! One can only imagine what the reality must be like currently in the dead zone that is European Commercial Real Estate financing (and also in those barbaric lands west of the Atlantic). Yet somehow the Euro keeps appreciating every day against the dollar. Let the Kool Aid flow.