Monday, January 05, 2009

CRE Crash Spreading

by Bill McBride on 1/05/2009 12:21:00 AM

From Charles V. Bagli at the NY Times: As Vacant Office Space Grows, So Does Lenders’ Crisis

By many accounts, building owners have been caught off guard by how quickly the market has deteriorated in recent weeks.

Rising vacancy rates were expected in Orange County, Calif., a center of the subprime mortgage crisis, and New York, where the now shrinking financial industry dominates office space. But vacancies are also suddenly climbing in Houston and Dallas, which had been shielded from the economic downturn until recently by skyrocketing oil prices and expanding energy businesses. In Chicago, brokers say demand has dried up just as new office towers are nearing completion.
...
Among commercial properties, the most troubled have been hotels and shopping centers, where anemic sales and bankruptcies by retailers are leading to more vacancies and where heavily leveraged mall operators, like General Growth Properties and Centro, are under intense pressure to sell assets. But analysts are increasingly worried about the office market.
This is an excellent overview - I suggest reading the entire article. The point about regional banks is very important:
Regional banks may be an even bigger concern. In the last decade, they barreled their way into commercial real estate lending after being elbowed out of the credit card and consumer mortgage business by national players. The proportion of their lending that is in commercial real estate has nearly doubled in the last six years, according to government data.
Most regional banks avoided the residential real estate market (because they couldn't compete) and instead focused on CRE lending. Now with CRE imploding, the number of bank failures will probably rise rapidly in 2009.