Bolstered by reckless monetary policies, unwarranted regulatory forebearance, Hollywood-style accounting, and investors' short memories, the commercial real estate market has in recent times been a bastion of tranquility, attracting the interest of yield-chasing institutions and individuals alike. But some developments suggest the tide is turning.
For one thing, as HousingWire details in "November Bank Failures Tied to CRE Exposure, More Closures to Come," the excesses of the past are still coming home to roost, especially in the banking sector.
The five banks that failed in November were victims of exposure to commercial real estate, analytics firm Trepp LLC said Monday.
The November data follow the pattern exhibited throughout 2011, in which bank failures spiked in the month following the end of a quarter and then dropped during the subsequent two months. Eleven banks failed in October — also because of CRE exposure.
Total bank failures this year now stand at 90, putting the annualized pace just under 100 for 2011. Nearly 300 banks were shuttered by regulators in 2009 and 2010 combined.
Meanwhile, market conditions look to be less than supportive, as the Credit Union Times reveals in "Fed: Commercial Real Estate Still Sluggish."
According to the latest Fed’s Beige Book, released Thursday, nearly all of the 12 districts said CRE market activity has not experienced any significant increases.
Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas City, Minneapolis, New York, Philadelphia, Richmond, Va., San Francisco and St. Louis make up the Fed’s districts.
Boston, New York, Chicago, Minneapolis and San Francisco indicated roughly unchanged activity while Philadelphia and Dallas indicated mixed activity. Richmond and St. Louis reported slow activity, although industrial construction had picked up. The Fed said New York and Philadelphia reported generally weak conditions.
Cleveland saw steady to slowly improving commercial construction and Chicago and Minneapolis experienced modest to moderate increases, the Fed reported.
Other reports confirm a deteriorating outlook, including this one from Pensions & Investments, entitled "Risks Rising as Realty Firms Buy From, Sell to Each Other":
Adding to pressures to sell is the fact that some of the properties in managers' portfolios are either becoming distressed or are in need of capital infusions that managers do not have.
“Many fund managers that were able to access capital did so two or three years ago. Due to poor fundamentals, we have seen once-transitional properties that were subsequently stabilized becoming transitional again,” said Jarret Cohen, head of private real estate at Fir Tree Partners Inc., a New York-based hedge fund firm. “Some owners are unable to contribute additional capital for leasing and required maintenance, and thus will likely sell their properties.”
Then there are the unwelcome realities of the CRE refinancing cycle. As the Wall Street Journals' Developments blog notes in "Commercial Delinquencies Down, for Now," the loans granted to finance dodgy deals done at the height of the boom are beginning to come due.
The delinquency rate on U.S. loans tied to commercial mortgage-backed securities ticked down in November, with payments at least 30 days late for 9.51% of all such loans, according to real estate research service Trepp LLC.
While the rate was down from 9.77% in October, it’s hovered in the mid-9% range throughout the year, and there are few signs that it’s likely to change any time soon. About $15.5 billion of loans made in 2007 — back when loans with loose standards were still common — are set to mature next year, according to Trepp. The firm expects more than half of those to head into special servicing, when a distressed loan specialist considers a rework of the mortgage.
The continued pain in the commercial real estate world — a healthy delinquency rate is below 1% — comes as job growth has been anemic and investors are wary about the direction of the economy, particularly given the turmoil across the Atlantic.
“The day of reckoning is here for the class of 2007 originated loans,” Trepp wrote in its monthly delinquency report.
To top it all off, real estate insiders are growing more pessimistic about their industry's prospects.
"Commercial Real Estate Execs Trim Expectations Amid Weak Job Growth, Political Gridlock, Regulatory Uncertainty"
Real Estate Roundtable’s Q4 Sentiment Index Drops to 2009 Levels
Reflecting concerns about the pace of economic recovery, Washington’s ability to address fiscal and tax policy challenges, a host of new regulatory requirements, and the long-term European debt situation, The Real Estate Roundtable’s latest “Sentiment Index” of commercial real estate executives slid for the second quarter in a row — hitting its lowest point since the fall of 2009.
So much for that light at the end of the tunnel.