Potential for CRE Armageddon Fading

Weakness, Trouble Remain but Healthy Lenders Could Carry CRE Markets to Better Days

Although first quarter results of U.S. bank holding companies across the country are unmistakably downbeat about the short-term outlook for commercial real estate in general, and their portfolios in particular, they also hint at a growing sense that the problems are working themselves out.

For starters, banks generally reported that troubled loan assets were systematically moving through their books. For example, older construction loans on commercial developments and owner-occupied properties were being shifted to term loans, giving borrowers a chance to work through slow cash flow periods.

Banks were also widely reporting that the inflow of new nonperforming commercial real estate loans was beginning to slow down. At the same time, more of the loans already being labeled as nonperforming were being shifted to the real estate owned (REO) category. From there, it is likely only a matter of time before those assets would be sold back into the marketplace.

In the performing section of their portfolios, banks reported that a substantial portion of those assets have also already been renewed or restructured.

In its April 2010 Global Financial Stability Report, the International Monetary Fund contained a brighter outlook for bank losses in the near term, as expected write-downs on both the loan and securities books of U.S. banks decreased across the board compared to last fall, said Mark Fitzgerald, senior debt analyst for CoStar Group.

“These improved short-term losses are due primarily to two factors. First, signs of an improving economic environment have decreased loss expectations,” Fitzgerald said. “Second, some write-downs have simply been pushed forward, as external factors, including low interest rates, have enabled banks to push off distress into the future.”

In part because of that delay, the IMF report forecasts real estate loan charge-offs are still expected to increase in 2010 and may not peak until 2011. Continue reading “Potential for CRE Armageddon Fading”

Los Angeles Office Update – 1st Quarter – 2010

Los Angeles Office Update – 1st Quarter – 2010

West LA Office Market Highlights:

Total Vacancy – 15%  – About 152,000 of the Yahoo! sublease in Santa Monica went vacant in the first quarter

Direct Current Monthly Lease Rate:  $3.45/FSG

Net Absorption (Negative)  -248,232 sq. ft.  (Approximately 100,000 of negative absorption was in Century City with HBO vacating)

This is the highest overall vacancy rate in West LA since the second quarter of 2004

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Los Angeles Office Market, as a whole:

During the first quarter 2010, the Greater Los Angeles office market experienced a direct vacancy rate jump from 14.8% at the end of the fourth quarter 2009 to 15.3%. The overall vacancy rate, which includes sublease space, also increased from 16.6% to 17.1% over the same period, the tenth straight quarterly increase.  As a result, seven of the nine submarket areas in Greater Los Angeles witnessed negative net absorption for the quarter with four of them totaling more than negative 200,000 square feet. This represented the eleventh straight quarter with negative net absorption in the LA office market.

Current Sub-Market Overall Vacancy Rates (Direct and Sub-Lease):

Downtown:   17.4%

Hollywood/Wilshire Corridor:  15.6%

San Fernando Valley:  20.8%

South Bay:  18.1%

West Los Angeles:  15%

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Other Stats:

The unemployment rate in Los Angeles County was 12.3% in February 2010, compared to a rate of 12.8% for California and 10.4% for the nation.
At the end of the first quarter 2010, the overall vacancy rate in Greater Los Angeles increased for the tenth straight quarter totaling 17.1%.
The weighted average asking lease rate for office space in Greater Los Angeles dropped during the first quarter to $2.45, a 2-cent decrease compared to the fourth quarter 2009.
Net absorption during the first quarter of 2010 totaled nearly 966,000 square feet of negative activity in Greater Los Angeles.

US Real Estate Market Update from Keller Williams

Commentary:

The economic recovery continues to slowly but steadily deepen its roots.  Consumer sentiment ticked up in March and it appears businesses are feeling more positive as well. According to a CEO Economic Outlook Survey, America’s top CEOs are expecting an increase in sales, along with increased or stabilized capital spending and employment.

Over the past several months, the hot topic of health care reform took much of Congress’s attention.  Now, with the bill passed into law, the government is turning its attention to other matters to help bolster the economy including the job bill and financial reform.

High unemployment and elevated levels of foreclosures and distressed homeowners continue to be two of the biggest factors in preventing a robust recovery.  The government’s attentive attitude toward these obstacles is seen as a positive sign by industry and economic experts.

Existing Home Sales:

Existing home sales softened in February. According to Lawrence Yun, NAR chief economist, the widespread winter storms during the month may have masked underlying demand as “buyers couldn’t get out to look at homes in some areas and that should negatively impact near-term contract activity.” February sales of 5.02 million remained 7 percent above the 4.69 million-units last year.

Median Home Price:

The median price for an existing home was $165,100 in February, a 1.8 percent drop from February 2009. Distressed homes, which accounted for 35 percent of sales last month, continued to skew prices downward as they typically were discounted in comparison with non-distressed homes. Continue reading “US Real Estate Market Update from Keller Williams”

CMBS Failures Contribute to Rising Bank Failures

An article over at National Real Estate Investor relates that the delinquency rate for commercial mortgage-backed securities rose sharply in March to more than 7%.

Troubled commercial real estate and construction loans are contributing to higher bank failure rates, Trepp reports. The researcher projects that 200 banks will fail in 2010.

Many of the failures to date have occurred in Florida, Georgia and California, as well as in the rust belt markets of Illinois, Wisconsin, Minnesota and Michigan.

The banks are already feeling the effects of the highest delinquency rate in CMBS history at 7.61%. The percentage of loans 30 or more days delinquent, in foreclosure or REO, jumped 89 basis points, according to the new report.

Read the full report.

The Real Unemployment Rate Is Pretty Grim

Steve McCann, writing in The American Thinker, analyzes the actual unemployment data from the Bureau of Labor Statistics.  As he says:

The Obama administration and their sycophants in the (once)-mainstream media trumpeted the increase of 162,000 jobs in March claiming that the recovery in underway and becoming entrenched.  This included 48,000 part-time workers for the Census and another 40,000 new part-time jobs in the rest of the economy.

Nevertheless, behind these headlines the data from the Bureau of Labor Statistics also reveal a grimmer side of the picture.
The number of long-term unemployed (more than 27 weeks) in March rose to more than 6.5 million.  The percentage of people unemployed for 27 weeks or more also rose to a record 44.1% of all jobless.

The figures also showed the average earnings per hour dropped and the number of people working part-time increased.
The underemployment rate — which includes part-time and those who have given up looking increased to 16.9% from 16.8%.  At some point soon many of those who have given up looking will re-enter the workforce in search of employment and thereby exacerbating the unemployment rate.

Further, the latest Gallup Daily tracking (yes, that right wing outfit) found that 20.3% of the U.S. workforce was underemployed in March, up from 19.6% in December and higher than the previous month.

Further in the construction sector, which was touted to be helped by the Obama stimulus bill, the unemployment rate remains at 24.9%?

So, in actuality, the REAL national unemployment rate is not the 9.7% the government would like everyone to believe, but is now somewhere in the high teens. I would guess that some of the estimates I have heard about unemployment rate being somewhere between 18% and 19%, nationally is probably pretty accurate, considering the above. Of course, in states like Michigan and California, the rate will be higher than that.