With Few Sales Closing, Property Listings Pile Up
May 20, 2009 - CRE News
While buyers remain unwilling or unable to make purchases, the inventories of property offerings and distressed assets are mounting substantially, according to Real Capital Analytics.
The disparity hit a high note in April, when the volumes of properties made available for sale far exceeded the sale of all major property types. A total of $2 billion of properties in the four major sectors changed hands during the month. But $11.5 billion of properties were offered for sale.
Meanwhile, the volume of commercial property assets that the New York research firm considers distressed increased by $19 billion - the largest monthly increase ever for assets reported to be in default, foreclosure or involved in a bankruptcy.
Not surprisingly, retail properties proved most difficult to sell, with only $460 million of those assets changing hands. But $4.2 billion worth of those properties were being offered for sale during the month. From January through April, its totals are $2.4 billion in sales versus $10.9 billion in new offerings.
The sector is also the market leader in distressed assets, with $12.7 billion added to the category last month, increasing the sector's full-year volume of newly-distressed properties to $16.8 billion. The lion's share of last month's additions resulted from the bankruptcy filing of General Growth Properties, the Chicago REIT that owns interests in more than 200 shopping malls.
Owners of industrial properties placed $2.1 billion of their assets on the sales block last month, but were able to sell only $266 million.
The office sector stood out in April for the severity of its sales-volume downturn with $387 million of closed sales versus a $1 billion monthly average in the three preceding months. For the four months ended April 30, the sector has seen $4.4 billion of closed sales versus $12 billion of new offerings.
Multifamily is the only sector that showed any glimmer of improvement in April, when it posted $900 million in closed sales, its highest monthly total this year. The volume of new offerings dropped slightly to $1.8 billion. The 2:1 ratio for offerings versus sales in April compares to the sector's 3:1 ratio for the latest four-month period.
Real Capital said that multifamily's narrowed gap in offerings versus sales may be a sign that "sellers are stepping back" from the market. At the same time, sales in the sector have been greased by the still-available debt capital from Fannie Mae and Freddie Mac. In fact, such agency financing was used to finance the bulk of the multifamily sales made by Northwestern Mutual Life Insurance, which included a combined 1,368 units in Southern California that were sold in three deals worth a combined $201.3 million. Those deals accounted for nearly a quarter of the month's transaction volume.
Real Capital also noted that multifamily may be preceding the other sectors in a recovery because it was the first sector to turn after peaking in the first quarter of 2006, when the housing market began to tumble.
Copyright © 2009 Commercial Real Estate Direct, a service of FM Financial Publishing LLC. All rights reserved.
Saturday, May 30, 2009
No Credit Means Businesses Face Default
Daily Real Estate News | May 29, 2009 | Share
No Credit Means Businesses Face Default
Commercial credit remains almost impossible to get, even for well-qualified borrowers.
According to New York Democratic Congresswoman Carolyn Maloney, who spoke before a Congressional Oversight Panel this week, "Access to commercial credit is absolutely frozen."
Unlike residential real estate loans, commercial real estate loans don’t usually require repayment of the principal loan balance and the repayment period is much shorter. As the deadline for repayment nears, borrowers typically refinance. If they can't refinance, then they are forced to default.
Richard Parkus, head of CMBS and ABS synthetics research at Deutsche Bank Securities Inc., says two-thirds of outstanding loans packaged into commercial mortgage-backed securities could face trouble refinancing in the next few years. Those loans are worth a total of about $400 billion, he estimates.
Source: The Associated Press, Stephen Bernard (05/28/2009)
No Credit Means Businesses Face Default
Commercial credit remains almost impossible to get, even for well-qualified borrowers.
According to New York Democratic Congresswoman Carolyn Maloney, who spoke before a Congressional Oversight Panel this week, "Access to commercial credit is absolutely frozen."
Unlike residential real estate loans, commercial real estate loans don’t usually require repayment of the principal loan balance and the repayment period is much shorter. As the deadline for repayment nears, borrowers typically refinance. If they can't refinance, then they are forced to default.
Richard Parkus, head of CMBS and ABS synthetics research at Deutsche Bank Securities Inc., says two-thirds of outstanding loans packaged into commercial mortgage-backed securities could face trouble refinancing in the next few years. Those loans are worth a total of about $400 billion, he estimates.
Source: The Associated Press, Stephen Bernard (05/28/2009)
Uniform Process for Short Sales Will Help Struggling Homeowners, Say Realtors®
WASHINGTON, May 14, 2009
Help is on the way for many homeowners who are facing foreclosure, thanks to new details under the Making Home Affordable Program announced today by the U.S. Treasury and the U.S. Department of Housing and Urban Development.
The Making Home Affordable Program is designed to help homeowners obtain modifications to their loan so they can afford to stay in their home. Where a modification is not possible, new incentives encourage the “quick private sale or voluntary transfer of property, which will save homeowners money and protect their financial future,” according to U.S. Treasury Secretary Timothy Geithner. The National Association of Realtors® expects that a uniform process for handling short sales and financial incentives will facilitate this process. View a summary of the incentives and process (PDF)
“NAR is pleased that the government is stepping in to help prevent foreclosures by streamlining the short-sale and deeds-in-lieu process,” said NAR President Charles McMillan, a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth. “NAR has been calling for uniform short sales procedures and other initiatives that will help today’s homeowners in challenging economy.”
Short sales occur when a bank agrees to let homeowners who have fallen behind on their mortgage to sell their home for less than they owe on their mortgage. Visit www.treasury.gov for detailed information on the program changes.
“Many families are finding themselves with a mortgage that is higher than their current home value, and they are struggling,” said McMillan. “As Secretary Geithner noted, and as NAR has been advocating for many months, stemming the foreclosure crisis and stabilizing the housing market are critical to our economic recovery.”
“We have heard from Realtors® that the extensive delay in the short sale process had caused many buyers to go elsewhere and have left many would-be sellers with no option but foreclosure. We are all pleased that the government has stepped in to help homeowners and those wishing to buy a home,” McMillan said.
The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1.2 million members involved in all aspects of the residential and commercial real estate industries.
Help is on the way for many homeowners who are facing foreclosure, thanks to new details under the Making Home Affordable Program announced today by the U.S. Treasury and the U.S. Department of Housing and Urban Development.
The Making Home Affordable Program is designed to help homeowners obtain modifications to their loan so they can afford to stay in their home. Where a modification is not possible, new incentives encourage the “quick private sale or voluntary transfer of property, which will save homeowners money and protect their financial future,” according to U.S. Treasury Secretary Timothy Geithner. The National Association of Realtors® expects that a uniform process for handling short sales and financial incentives will facilitate this process. View a summary of the incentives and process (PDF)
“NAR is pleased that the government is stepping in to help prevent foreclosures by streamlining the short-sale and deeds-in-lieu process,” said NAR President Charles McMillan, a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth. “NAR has been calling for uniform short sales procedures and other initiatives that will help today’s homeowners in challenging economy.”
Short sales occur when a bank agrees to let homeowners who have fallen behind on their mortgage to sell their home for less than they owe on their mortgage. Visit www.treasury.gov for detailed information on the program changes.
“Many families are finding themselves with a mortgage that is higher than their current home value, and they are struggling,” said McMillan. “As Secretary Geithner noted, and as NAR has been advocating for many months, stemming the foreclosure crisis and stabilizing the housing market are critical to our economic recovery.”
“We have heard from Realtors® that the extensive delay in the short sale process had caused many buyers to go elsewhere and have left many would-be sellers with no option but foreclosure. We are all pleased that the government has stepped in to help homeowners and those wishing to buy a home,” McMillan said.
The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1.2 million members involved in all aspects of the residential and commercial real estate industries.
Wednesday, May 20, 2009
Daily Real Estate News
May 20, 2009
Credit Crunch, Economy Hurt Commercial Sector
The general economic downturn, complicated by a severe credit crunch in commercial real estate, is dampening commercial real estate activity. In addition, a forward-looking index shows the forecast for commercial real estate sectors will remain weak for the remainder of the year, according to the NATIONAL ASSOCIATION of REALTORS®.
Lawrence Yun, NAR chief economist, said commercial real estate has been hit by a double whammy. “Significant job losses have reduced the demand for commercial space, while a lack of credit has stalled transactions and refinancing activity,” he said.
“It is critical for the Federal Reserve to increase liquidity by purchasing commercial mortgage-backed securities. Because commercial real estate always lags an overall economic recovery, it will take some time for the commercial real estate market to rebound.”
Declines in Commercial Indices
The Commercial Leading Indicator for Brokerage Activity fell 4.8 percent to an index of 103.5 in the first quarter from a downwardly revised reading of 108.7 in the fourth quarter, and is 12.9 percent below the 118.8 recorded in the first quarter of 2008. NAR’s track of the commercial leading indicator dates back to 1990.
The weakening index means commercial real estate activity, as measured by net absorption and the completion of new commercial buildings, can be expected to decline over the next six to nine months.
The Society of Industrial and Office REALTORS®, in its SIOR Commercial Real Estate Index, a separate attitudinal survey of more than 600 local market experts, also indicates a lower level of business activity in upcoming quarters. More than 90 percent of respondents believe it is a tenant’s market, with many tenants benefiting from moderate to deep discounts in office and industrial rental rates, as well as landlord concessions.
The SIOR index has declined for nine straight quarters and stood at 42.3 in the first quarter, well below the 100 point criteria that represents a balanced marketplace.
REALTORS® Commercial Alliance Committee chair Robert Toothaker said data for commercial mortgage-backed securities are very telling. “We went from $230 billion in CMBS issued in 2007 to only $12 billion in 2008,” he said. “Thus far in 2009 the number is essentially zero – liquidity in commercial credit is crucial to prevent damage to the broader economy. We need better policies and progress in accounting rules to facilitate lending.”
Overall, commercial vacancy rates are rising and rents are softening, according to NAR’s latest Commercial Real Estate Outlook. The NAR forecast for four major commercial sectors analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data were provided by Torto Wheaton Research.
Overall Economic Outlook
The gross domestic product is expected to contract 2.9 percent this year, then grow 1.4 percent in 2010. Similarly, the consumer price index is forecast to decline 0.8 percent in 2009 before rising 1.7 percent next year.
The unemployment rate is projected to average 9.5 percent this year and 10.2 percent in 2010. Inflation-adjusted disposable income is likely to grow 1.3 percent in 2009 and 1.1 percent next year.
“Although we expect the economy to begin to stabilize later this year, unemployment will probably peak at about 10.5 percent around the end of 2009,” Yun said. “The job picture should gradually improve as 2010 progresses, but the fundamentals in commercial real estate won’t stabilize until somewhat later and will depend on the Fed’s actions.”
Office Market
The office sector is suffering the most from job losses, which continue to reduce demand for space. Vacancy rates are projected to increase to 16.1 percent in 2009 from 13.4 percent last year, and rise to 20.4 percent in 2010.
Annual rent in the office sector is forecast to fall 7.2 percent this year and 0.8 percent in 2010 after a 0.4 percent decline last year. In 57 markets tracked, net absorption of office space, which includes the leasing of new space coming on the market as well as space in existing properties, is seen as a negative 81.7 million square feet in 2009 and a negative 115.0 million next year.
Industrial Market
The global economic slowdown is affecting the industrial sector, which had benefited from a demand for exports before the recent slump. Vacancy rates in the industrial sector are estimated to rise to 11.9 percent in 2009 and 12.6 percent next year, compared with 10.4 percent in 2008.
Annual rent is likely to fall 3.4 percent this year and 4.0 percent in 2010, after declining 0.8 percent in 2008. Net absorption of industrial space in 58 markets tracked should be a negative 51.0 million square feet this year, then a positive 23.2 million in 2010. Many obsolete structures remain on the market because construction in recent years was designed to meet customized needs of industrial clients.
Retail Market
With consumers reluctant to spend much in the current economy, the retail vacancy rate will probably rise to 12.1 percent this year and 15.8 percent in 2010 from 9.7 percent in 2008.
Average retail rent is expected to fall 2.1 percent in 2009 and 1.5 percent next year; it declined 2.0 percent in 2008. Net absorption of retail space in 53 tracked markets will likely be a negative 38.6 million square feet this year and a negative 44.2 million in 2010.
Multifamily Market
The apartment rental market – multifamily housing – has been doing better than other commercial sectors, but a gain in home sales during the second half of this year will modify demand. Multifamily vacancy rates are forecast to rise to 6.8 percent in 2009 and 6.7 percent next year from 5.7 percent in 2008.
Average rent should grow 1.5 percent this year and 2.5 percent in 2010, following a 2.9 percent gain in 2008. Multifamily net absorption is projected at 133,000 units in 59 tracked metro areas in 2009 and 89,700 next year.
Source: NAR
May 20, 2009
Credit Crunch, Economy Hurt Commercial Sector
The general economic downturn, complicated by a severe credit crunch in commercial real estate, is dampening commercial real estate activity. In addition, a forward-looking index shows the forecast for commercial real estate sectors will remain weak for the remainder of the year, according to the NATIONAL ASSOCIATION of REALTORS®.
Lawrence Yun, NAR chief economist, said commercial real estate has been hit by a double whammy. “Significant job losses have reduced the demand for commercial space, while a lack of credit has stalled transactions and refinancing activity,” he said.
“It is critical for the Federal Reserve to increase liquidity by purchasing commercial mortgage-backed securities. Because commercial real estate always lags an overall economic recovery, it will take some time for the commercial real estate market to rebound.”
Declines in Commercial Indices
The Commercial Leading Indicator for Brokerage Activity fell 4.8 percent to an index of 103.5 in the first quarter from a downwardly revised reading of 108.7 in the fourth quarter, and is 12.9 percent below the 118.8 recorded in the first quarter of 2008. NAR’s track of the commercial leading indicator dates back to 1990.
The weakening index means commercial real estate activity, as measured by net absorption and the completion of new commercial buildings, can be expected to decline over the next six to nine months.
The Society of Industrial and Office REALTORS®, in its SIOR Commercial Real Estate Index, a separate attitudinal survey of more than 600 local market experts, also indicates a lower level of business activity in upcoming quarters. More than 90 percent of respondents believe it is a tenant’s market, with many tenants benefiting from moderate to deep discounts in office and industrial rental rates, as well as landlord concessions.
The SIOR index has declined for nine straight quarters and stood at 42.3 in the first quarter, well below the 100 point criteria that represents a balanced marketplace.
REALTORS® Commercial Alliance Committee chair Robert Toothaker said data for commercial mortgage-backed securities are very telling. “We went from $230 billion in CMBS issued in 2007 to only $12 billion in 2008,” he said. “Thus far in 2009 the number is essentially zero – liquidity in commercial credit is crucial to prevent damage to the broader economy. We need better policies and progress in accounting rules to facilitate lending.”
Overall, commercial vacancy rates are rising and rents are softening, according to NAR’s latest Commercial Real Estate Outlook. The NAR forecast for four major commercial sectors analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data were provided by Torto Wheaton Research.
Overall Economic Outlook
The gross domestic product is expected to contract 2.9 percent this year, then grow 1.4 percent in 2010. Similarly, the consumer price index is forecast to decline 0.8 percent in 2009 before rising 1.7 percent next year.
The unemployment rate is projected to average 9.5 percent this year and 10.2 percent in 2010. Inflation-adjusted disposable income is likely to grow 1.3 percent in 2009 and 1.1 percent next year.
“Although we expect the economy to begin to stabilize later this year, unemployment will probably peak at about 10.5 percent around the end of 2009,” Yun said. “The job picture should gradually improve as 2010 progresses, but the fundamentals in commercial real estate won’t stabilize until somewhat later and will depend on the Fed’s actions.”
Office Market
The office sector is suffering the most from job losses, which continue to reduce demand for space. Vacancy rates are projected to increase to 16.1 percent in 2009 from 13.4 percent last year, and rise to 20.4 percent in 2010.
Annual rent in the office sector is forecast to fall 7.2 percent this year and 0.8 percent in 2010 after a 0.4 percent decline last year. In 57 markets tracked, net absorption of office space, which includes the leasing of new space coming on the market as well as space in existing properties, is seen as a negative 81.7 million square feet in 2009 and a negative 115.0 million next year.
Industrial Market
The global economic slowdown is affecting the industrial sector, which had benefited from a demand for exports before the recent slump. Vacancy rates in the industrial sector are estimated to rise to 11.9 percent in 2009 and 12.6 percent next year, compared with 10.4 percent in 2008.
Annual rent is likely to fall 3.4 percent this year and 4.0 percent in 2010, after declining 0.8 percent in 2008. Net absorption of industrial space in 58 markets tracked should be a negative 51.0 million square feet this year, then a positive 23.2 million in 2010. Many obsolete structures remain on the market because construction in recent years was designed to meet customized needs of industrial clients.
Retail Market
With consumers reluctant to spend much in the current economy, the retail vacancy rate will probably rise to 12.1 percent this year and 15.8 percent in 2010 from 9.7 percent in 2008.
Average retail rent is expected to fall 2.1 percent in 2009 and 1.5 percent next year; it declined 2.0 percent in 2008. Net absorption of retail space in 53 tracked markets will likely be a negative 38.6 million square feet this year and a negative 44.2 million in 2010.
Multifamily Market
The apartment rental market – multifamily housing – has been doing better than other commercial sectors, but a gain in home sales during the second half of this year will modify demand. Multifamily vacancy rates are forecast to rise to 6.8 percent in 2009 and 6.7 percent next year from 5.7 percent in 2008.
Average rent should grow 1.5 percent this year and 2.5 percent in 2010, following a 2.9 percent gain in 2008. Multifamily net absorption is projected at 133,000 units in 59 tracked metro areas in 2009 and 89,700 next year.
Source: NAR
Monday, May 18, 2009
New Sands Casino Opening in Bethlehem
I previewed the awesome new Sands Casino in Bethlehem BEFORE it opened! Love how the building looks like the old Steel mill. Opening to the public this weekend: https://www.pasands.com
Saturday, May 16, 2009
Federal Funds to Boost Commercial Real Estate
Daily Real Estate News | May 14, 2009 |
Federal Funds to Boost Commercial Real Estate
The federal government will take major steps to boost lending and prevent a meltdown in the commercial real estate market, representatives from the U.S. Treasury Department said Wednesday at the 2009 REALTORS® Midyear Legislative Meetings in Washington, D.C.
The number of new loans for commercial properties sank 70 percent in the first three months of 2009 from a year earlier, the Mortgage Bankers Association reported this week.
To loosen up tight lending, Treasury officials said they will include commercial mortgage-backed securities purchases in its Term Asset-Backed Securities Loan Facility (TALF) program. Previously, the department said total TALF assistance could amount to $1 trillion.
“Brokers, REALTORS®, and borrowers are finding it very hard to transact in this market,” Seth Wheeler, deputy assistant secretary for federal finance at Treasury, told the group. “What we’re trying to do is provide a pull channel for financing. It will take time, but we hope we’ll see a return of liquidity.”
However, some subcommittee members were skeptical about the program. A few of them argued that most of the stimulus funds that have been dispensed thus far have not made it to consumers or small businesses, two critical groups for the commercial real estate sector. They asked the Treasury representatives when these groups would receive greater assistance.
While the Treasury officials did not provide specific timelines, they assured the attendees that they would act soon.
“We understand how important the issue is,” Wheeler said. “We want to move as quickly as possible to form a policy response.”
—Brian Summerfield, REALTOR® Magazine
Federal Funds to Boost Commercial Real Estate
The federal government will take major steps to boost lending and prevent a meltdown in the commercial real estate market, representatives from the U.S. Treasury Department said Wednesday at the 2009 REALTORS® Midyear Legislative Meetings in Washington, D.C.
The number of new loans for commercial properties sank 70 percent in the first three months of 2009 from a year earlier, the Mortgage Bankers Association reported this week.
To loosen up tight lending, Treasury officials said they will include commercial mortgage-backed securities purchases in its Term Asset-Backed Securities Loan Facility (TALF) program. Previously, the department said total TALF assistance could amount to $1 trillion.
“Brokers, REALTORS®, and borrowers are finding it very hard to transact in this market,” Seth Wheeler, deputy assistant secretary for federal finance at Treasury, told the group. “What we’re trying to do is provide a pull channel for financing. It will take time, but we hope we’ll see a return of liquidity.”
However, some subcommittee members were skeptical about the program. A few of them argued that most of the stimulus funds that have been dispensed thus far have not made it to consumers or small businesses, two critical groups for the commercial real estate sector. They asked the Treasury representatives when these groups would receive greater assistance.
While the Treasury officials did not provide specific timelines, they assured the attendees that they would act soon.
“We understand how important the issue is,” Wheeler said. “We want to move as quickly as possible to form a policy response.”
—Brian Summerfield, REALTOR® Magazine
Thursday, May 14, 2009
Banks Stress Tests/Commercial Real Estate
What the Bank 'Stress Tests' Tell Us About Commercial Real Estate
Most Potential Harm Seen Coming From Housing, Consumer Loan Defaults, Not Office, Industrial and Retail Property Loans
By Mark Heschmeyer
May 13, 2009
If the current economic malaise brings down any of the largest banks in the country, commercial real estate likely WON'T be the culprit. Office, industrial and retail properties specifically are even less likely to bring down the nation's top banks.
The 19 largest U.S. banks, which account for 70% of the bank holdings of this country, were the focus of the U.S. Federal Reserve 'stress tests' results released this past week. Under the worst case scenarios envisioned for the current recession, commercial real estate losses would cost those banks $53 billion in losses this year and next.
While that is a lot of money, it still pales in comparison with residential loan losses, which still would make up the bulk of the projected losses, $185.5 billion. In fact, exposure to commercial real estate loans falls way down the line in terms of producing projected losses for banks. Trading and counterparty investments would lose $99 billion; consumer loans $83.7 billion; credit card loans $82.4 billion; business loans, $60.1 billion; only then comes commercial real estate.
The two-year loss estimates totaled about $600 billion in the more adverse scenario for the 19 bank holding companies.
Estimated losses on residential mortgages are substantial over the two-year scenario, consistent with the sharp drop in residential house prices in the past two years and their projected continued steep fall in the more adverse scenario. The effects of reduced home prices on household wealth and the indirect effects through reduced economic activity, also push up estimated losses on consumer credit, including losses on credit cards and on other consumer loans. Together, residential mortgages and consumer loans (including credit card and other consumer loans) account for $322 billion, or 70% of the loan losses projected under the more adverse scenario.
Even in terms of percentages of losses, commercial real estate loans hold up better on the banks' books than its other assets and investments. About 22.5% each of residential real estate loans and credit card loans would go bad but only 8.5% of commercial real estate loans would go bad.
To cover those potential losses, the Federal Reserve has asked the 19 banks to raise $75 billion in additional common equity by next November.
"This was a carefully designed, credible test," said U.S. Treasury Secretary Tim Geithner. "Banks supervisors applied a historically high set of loss estimates on securities and loans, as well as a conservative view towards potential earnings that could act as a buffer against those losses."
"These are estimate of potential losses and earnings that could occur in the event of a more severe recession. They are not a prediction of where the economy is headed," Geithner added. "The results are less acute than some had expected, in part because concern about the risk of a more severe recession have diminished, market have improved, and banks, in anticipation of the release of the stress test, have acted in the last few months to increased capital."
The stress test process involved the projection of losses on loans and investment assets, as well as the firms' capacity to absorb losses. To analyze commercial real estate loans, the bank holding companies were asked to submit detailed portfolio information on property type, loan to value (LTV) ratios, debt service coverage ratios (DSCR), geography, and loan maturities.
Loss rates on commercial real estate loans reflected realized and projected substantial declines in real estate values. However, federal supervisors analyzed loans for construction (both residential and construction) and land development, multifamily property, and non-farm non-residential projects separately. And the bulk of the projected losses in the commercial real estate come from the construction and land development loans. Income producing properties fared much better.
The stress tests projected a baseline loss of 9% to 12% for construction loans and a worse case scenario of 15% to 18%; multifamily losses had a projected baseline loss of 3.5% to 6.5% and a worse case loss of 10% to 11%; office, industrial and retail properties had a projected baseline loss of 4% to 5% and worse case loss of 7% to 9%.
The results of the stress tests "were good news and were generally received as such, although it is important not to take excessive comfort from what remains essentially a highly educated guess as to the future of the banks in a very uncertain environment," concluded Douglas J. Elliott , a fellow in economic studies at The Brookings Institution. "The test appears to be somewhat tougher than the base case of the International Monetary Fund, but not nearly as harsh as the most pessimistic analyses."
"This implies that while we may well have turned the corner, we can be far from certain that the solvency crisis in banking is over," Elliott wrote in a paper this week. "Even if it is, the stubborn credit crunch will last for considerably longer. The banks will be in a better position to lend more freely as a result of the modest influx of new capital and the greater benefit of the confidence boost from passing the tests. However, the depth of this recession and the shattering of the securitization market will keep credit tight for some time."
One unintended side effect of the results of the stress test, Elliott said is that they will work against the government's plan to encourage investors to buy toxic assets from the banks.
"The government's reassurance that these banks have, or will soon have, the capital to handle even the stress scenario without selling their toxic assets makes it harder for the regulators to pressure the banks to actually sell," Elliott concluded. "This matters because the banks generally believe that even with government incentives the private investors are looking to pay unreasonably low prices for these assets."
The banks would generally prefer to hold onto the assets until they can get a better price, Elliott reasoned.
Generally across the board, the 19 bank holding companies put to the stress tests, said they believe the stress test assumptions were unreasonably conservative and actual losses will be far less than projected.
Regions Financial Corp. in Birmingham, AL, questioned whether it should be required to raise additional capital now to provide for a two-year adverse economic scenario, particularly in view of the fact that Federal Reserve Chairman Ben Bernanke this past week said that he expects the economy to begin recovering during 2009.
Regions said it believes that the stress test results do not accurately reflect the loan losses that Regions is likely to experience even in the "more adverse" economic scenario. In particular, the anticipated two-year cumulative loss ratio of 13.7% projected on its commercial real estate is sharply higher than Regions' actual annualized loss ratio on its portfolio in the first quarter and sharply higher than that projected for the other banking companies.
Bank of America Corp. in Charlotte, NC, was projected to have a 2-year loss rate on its commercial real estate loans of 7.4%, or 3.7% per year. Bank of America said its actual first quarter annualized loss rate on the equivalent portfolio was 1.68%. So, loss rates would have to more than double to 3.9% and remain there for the remaining seven quarters to reach the FRB's projections.
Additionally, the FRB's loss rate is well above the combined commercial and commercial real estate peak loss rate experienced by Bank of America in either the 1991 recession or the 2002 recession.
Individual CRE Stress Test Results
Company Est. Worse-Case CRE Loss As a % of Loans
Bank of America $9.4 billion 9.1%
Wells Fargo & Co. $8.4 billion 5.9%
Regions Financial $4.9 billion 13.7%
BB&T Corp. $4.5 billion 12.6%
PNC Financial Services Group $4.5 billion 11.2%
JPMorgan Chase & Co. $3.7 billion 5.5%
U.S. Bancorp $3.2 billion 10.2%
Fifth Third Bancorp $2.9 billion 13.9%
SunTrust Banks $2.8 billion 10.6%
Citigroup $2.7 billion 7.4%
KeyCorp $2.3 billion 12.5%
Capital One Financial $1.1 billion 6.0%
MetLife Inc. $800 million 2.1%
Morgan Stanley $600 million 45.2%
GMAC $600 million 33.3%
State Street $300 million 35.5%
Bank of New York Mellon $200 million 9.9%
American Express not applicable not applicable
Goldman Sachs Group not applicable not applicable
Most Potential Harm Seen Coming From Housing, Consumer Loan Defaults, Not Office, Industrial and Retail Property Loans
By Mark Heschmeyer
May 13, 2009
If the current economic malaise brings down any of the largest banks in the country, commercial real estate likely WON'T be the culprit. Office, industrial and retail properties specifically are even less likely to bring down the nation's top banks.
The 19 largest U.S. banks, which account for 70% of the bank holdings of this country, were the focus of the U.S. Federal Reserve 'stress tests' results released this past week. Under the worst case scenarios envisioned for the current recession, commercial real estate losses would cost those banks $53 billion in losses this year and next.
While that is a lot of money, it still pales in comparison with residential loan losses, which still would make up the bulk of the projected losses, $185.5 billion. In fact, exposure to commercial real estate loans falls way down the line in terms of producing projected losses for banks. Trading and counterparty investments would lose $99 billion; consumer loans $83.7 billion; credit card loans $82.4 billion; business loans, $60.1 billion; only then comes commercial real estate.
The two-year loss estimates totaled about $600 billion in the more adverse scenario for the 19 bank holding companies.
Estimated losses on residential mortgages are substantial over the two-year scenario, consistent with the sharp drop in residential house prices in the past two years and their projected continued steep fall in the more adverse scenario. The effects of reduced home prices on household wealth and the indirect effects through reduced economic activity, also push up estimated losses on consumer credit, including losses on credit cards and on other consumer loans. Together, residential mortgages and consumer loans (including credit card and other consumer loans) account for $322 billion, or 70% of the loan losses projected under the more adverse scenario.
Even in terms of percentages of losses, commercial real estate loans hold up better on the banks' books than its other assets and investments. About 22.5% each of residential real estate loans and credit card loans would go bad but only 8.5% of commercial real estate loans would go bad.
To cover those potential losses, the Federal Reserve has asked the 19 banks to raise $75 billion in additional common equity by next November.
"This was a carefully designed, credible test," said U.S. Treasury Secretary Tim Geithner. "Banks supervisors applied a historically high set of loss estimates on securities and loans, as well as a conservative view towards potential earnings that could act as a buffer against those losses."
"These are estimate of potential losses and earnings that could occur in the event of a more severe recession. They are not a prediction of where the economy is headed," Geithner added. "The results are less acute than some had expected, in part because concern about the risk of a more severe recession have diminished, market have improved, and banks, in anticipation of the release of the stress test, have acted in the last few months to increased capital."
The stress test process involved the projection of losses on loans and investment assets, as well as the firms' capacity to absorb losses. To analyze commercial real estate loans, the bank holding companies were asked to submit detailed portfolio information on property type, loan to value (LTV) ratios, debt service coverage ratios (DSCR), geography, and loan maturities.
Loss rates on commercial real estate loans reflected realized and projected substantial declines in real estate values. However, federal supervisors analyzed loans for construction (both residential and construction) and land development, multifamily property, and non-farm non-residential projects separately. And the bulk of the projected losses in the commercial real estate come from the construction and land development loans. Income producing properties fared much better.
The stress tests projected a baseline loss of 9% to 12% for construction loans and a worse case scenario of 15% to 18%; multifamily losses had a projected baseline loss of 3.5% to 6.5% and a worse case loss of 10% to 11%; office, industrial and retail properties had a projected baseline loss of 4% to 5% and worse case loss of 7% to 9%.
The results of the stress tests "were good news and were generally received as such, although it is important not to take excessive comfort from what remains essentially a highly educated guess as to the future of the banks in a very uncertain environment," concluded Douglas J. Elliott , a fellow in economic studies at The Brookings Institution. "The test appears to be somewhat tougher than the base case of the International Monetary Fund, but not nearly as harsh as the most pessimistic analyses."
"This implies that while we may well have turned the corner, we can be far from certain that the solvency crisis in banking is over," Elliott wrote in a paper this week. "Even if it is, the stubborn credit crunch will last for considerably longer. The banks will be in a better position to lend more freely as a result of the modest influx of new capital and the greater benefit of the confidence boost from passing the tests. However, the depth of this recession and the shattering of the securitization market will keep credit tight for some time."
One unintended side effect of the results of the stress test, Elliott said is that they will work against the government's plan to encourage investors to buy toxic assets from the banks.
"The government's reassurance that these banks have, or will soon have, the capital to handle even the stress scenario without selling their toxic assets makes it harder for the regulators to pressure the banks to actually sell," Elliott concluded. "This matters because the banks generally believe that even with government incentives the private investors are looking to pay unreasonably low prices for these assets."
The banks would generally prefer to hold onto the assets until they can get a better price, Elliott reasoned.
Generally across the board, the 19 bank holding companies put to the stress tests, said they believe the stress test assumptions were unreasonably conservative and actual losses will be far less than projected.
Regions Financial Corp. in Birmingham, AL, questioned whether it should be required to raise additional capital now to provide for a two-year adverse economic scenario, particularly in view of the fact that Federal Reserve Chairman Ben Bernanke this past week said that he expects the economy to begin recovering during 2009.
Regions said it believes that the stress test results do not accurately reflect the loan losses that Regions is likely to experience even in the "more adverse" economic scenario. In particular, the anticipated two-year cumulative loss ratio of 13.7% projected on its commercial real estate is sharply higher than Regions' actual annualized loss ratio on its portfolio in the first quarter and sharply higher than that projected for the other banking companies.
Bank of America Corp. in Charlotte, NC, was projected to have a 2-year loss rate on its commercial real estate loans of 7.4%, or 3.7% per year. Bank of America said its actual first quarter annualized loss rate on the equivalent portfolio was 1.68%. So, loss rates would have to more than double to 3.9% and remain there for the remaining seven quarters to reach the FRB's projections.
Additionally, the FRB's loss rate is well above the combined commercial and commercial real estate peak loss rate experienced by Bank of America in either the 1991 recession or the 2002 recession.
Individual CRE Stress Test Results
Company Est. Worse-Case CRE Loss As a % of Loans
Bank of America $9.4 billion 9.1%
Wells Fargo & Co. $8.4 billion 5.9%
Regions Financial $4.9 billion 13.7%
BB&T Corp. $4.5 billion 12.6%
PNC Financial Services Group $4.5 billion 11.2%
JPMorgan Chase & Co. $3.7 billion 5.5%
U.S. Bancorp $3.2 billion 10.2%
Fifth Third Bancorp $2.9 billion 13.9%
SunTrust Banks $2.8 billion 10.6%
Citigroup $2.7 billion 7.4%
KeyCorp $2.3 billion 12.5%
Capital One Financial $1.1 billion 6.0%
MetLife Inc. $800 million 2.1%
Morgan Stanley $600 million 45.2%
GMAC $600 million 33.3%
State Street $300 million 35.5%
Bank of New York Mellon $200 million 9.9%
American Express not applicable not applicable
Goldman Sachs Group not applicable not applicable
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