October 21, 2009
Retail Traffic has an article out citing economists on why commercial real estate won’t be the next shoe to drop. Certainly commercial real estate won’t have the impact that the sub-prime housing crisis had, and will be more of a bank-level problem than at the consumer-level, but credit is ultimately what is needed.
Take earnings at regional banks, and at supermarket firms such as Morgan Stanley and Bank of America, and it’s hard to deny the shoe is in fact dropping. We’re hearing of big deals teetering and other deals trading at significant losses, so their definition of not dropping is a semantics game. Sure it generally won’t be a hit the consumer will take directly, but at the bank level it is significant and will end up impacting the consumer.
The fact is that with the banks are able to borrow money at bargain basement rates from the FED. They turn around and buy treasuries and bonds and earn a giant profit on the backs of the taxpayer. Things have certainly stabilized, but it is these profits they are using to help offset losses in commercial real estate.
That is a nice way to bolster the banks and effectively provide them with a bailout without providing a bailout, but debt is debt. We’re just moving it around and helping the banks get it off the balance sheets slowly and onto the taxpayer. This will have an impact on growth. What’s more is that we’re introducing pretty significant risks into the market again, because the question that will need to be answered is what will happen once – not if – rates rise. Treasuries at the 5 to 30 year level are currently throwing off somewhere from 2.3 to 4% currently.
If shorter term rates bump up, then the treasury profit center could turn into a loss center for the banks. Therefore, an economy that comes back too strong and too quickly will lead to rising interest rates. That is part of the reason why we suspect that growth will likely be tempered for the next few years, and that it is still too early to take a deep plunge back into commercial real estate.
The slow recovery’s other pitfall is that many lenders and owners are hanging on hoping for a recovery. If one doesn’t come fast enough, then it further exacerbates that problem as well.
Perhaps things will change, and the debt magically disappears, but jumping back in with both feet is likely still a pretty risky proposition.
[via Retail Traffic]
- $100B of Losses at Local Banks
- Next Wave of Stress Tests To Focus on CRE
- FDIC’s Sheila Bair on Commercial Real Estate
- Government Expands Financial Stability Act to Include CMBS
- Dan Tishman on CNBC – CRE Second Shoe To Drop