Tuesday, December 25, 2007

Credit Crunch Hitting CRE

by Bill McBride on 12/25/2007 09:09:00 PM

From the WSJ: Credit Downturn Hits the Malls (hat tip Houston)

The credit crunch ... is creating problems in commercial real estate, driving down prices of office buildings, shopping malls and apartment complexes ...

For the past few months, the sector has been in a state of near-paralysis ... The number of major properties sold is down by half, and many worry that the market will continue to deteriorate as property sales remain slow, prices continue to drop and deals keep falling apart.
...
The CMBS market was the engine that drove the commercial real-estate boom. Over the past few years, the issuance of CMBS allowed banks to get rid of the risk on their books, lend with cheaper rates and looser terms and that made it easy for private-equity firms to do huge real-estate deals.
...
Real-estate investors aren't the only ones feeling the pain. Many big banks issued short-term loans to buyers and planned to sell them off later, much the way they do with loans made to private-equity buyout shops. But the banks have gotten stuck with an estimated $65 billion in fixed- and floating-rate loans on their books, according to J.P. Morgan.
The typical pattern is for CRE to follow residential by about 4 to 7 quarters, so this slowdown is right on schedule. It's important to note that the impact on the economy will come from a slowdown in new CRE construction (non-residential structure investment) and from rising CRE defaults.

The October construction spending report, from the Census Bureau, showed a small decline in private non-residential construction spending, after several years of strong growth.

Construction SpendingClick on graph for larger image.

This graph shows private residential and nonresidential construction spending since 1993.

Over the last couple of years, as residential spending has declined, nonresidential has been very strong. However it now appears that nonresidential construction may be slowing. This is just one month of data, and one month does not make a trend, but there is other evidence - like the Fed's Loan Officer Survey - that suggests a slowdown in nonresidential has arrived.

The November construction spending report will be released on Jan 2nd.