by Calculated Risk on 11/09/2008 07:24:00 PM

Charles Bagli at the NY Times provides some details for one building in New York: Market’s Collapse Echoes in a Manhattan Tower

The first sign of trouble came over the summer when iStar Financial, a real estate finance company, decided not to move into the 100,000 square feet of space ...

Several weeks later, Metropolitan Life Insurance ... quietly began shopping for tenants to sublease 100,000 square feet ...

And last month, Centerline Capital Group, a suddenly struggling commercial property finance and investment company, confirmed that it would not be moving into its 100,000 square feet ...

The companies signed leases for as much as $132 a square foot ... many brokers say they would be lucky to get $95 a square foot today.

Sublease space really hurt the NY office market in previous downturns, and it appears to be happening again.

by Calculated Risk on 11/09/2008 04:42:00 PM

Since investment in non-residential structures is slowing (especially malls, hotels, and offices), a key question is how did the commercial real estate (CRE) investment boom compare to the residential housing bubble? And how did the CRE boom compare to previous CRE booms?

The following graph shows residential investment compared to investment in non-residential structures as a percent of GDP since 1960. All data from the BEA.

Note: Residential investment is primarily single family structures, multi-family structures, commissions, and home improvement.

Click on graph for larger image in new window.

The recent housing boom and bust is very clear (in red).

Residential investment was 3.3% of GDP in Q3 2008, the lowest level since 1982 (just under 3.2%).

Non-residential investment in structures increased to almost 4% of GDP in Q3. This investment is slowing down right now (the Census Bureau has reported declines in non-residential investment for the last two months), and investment in non-residential structures will almost certainly be negative in Q4.

The current non-residential boom was greater than the late '90s boom, but much less than the non-residential boom in the '80s.

However much of the recent boom in non-residential investment is energy related. The second graph compares residential investment to non-residential investment in structures excluding Power and Petroleum exploration as a percent of GDP since 1960. With this comparison, the recent boom is less than the late '90s boom, and far less than the S&L related '80s boom.

This clearly shows that the recent boom in non-residential investment (ex power and petro) was not as excessive as the housing bubble.

Residential investment has declined by 3% of GDP so far from the peak. Non-residential investment would have to decline to about 1% of GDP (see first graph) to match the impact of GDP from the residential bust so far. And excluding power and petroleum, non-residential investment would have to be below zero to match the impact on GDP from the residential bust!

In percentage terms, residential has collapsed by about 50% (compared to GDP). Non-residential would have to decline to less than 2.0% of GDP (1.3% of GDP ex-power and petroleum) - the lowest level in history by far - to match the residential collapse in percentage terms.

Also, the recent boom for CRE was much less than the S&L related boom in the '80s, and even less than the late '90s CRE boom.

Some areas of non-residential investment have been overbuilt, and I've forecast significant declines for investment in offices, malls, and lodging. But those looking for a collapse in CRE investment comparable to the current residential investment bust are wrong.

by Calculated Risk on 11/09/2008 10:49:00 AM

From the WSJ: China Announces $586 Billion Stimulus Package

China's government announced a two-year stimulus exceeding a half-trillion dollars to offset the impact of slowing global growth ...

Just a year ago, China had adopted an unprecedented "tight" monetary policy, a step up in its three-year effort to keep the fast-growing economy from barreling out of control because it was expanding too quickly.

Professor Roubini cautioned last week about a hard landing in China (Note: Roubini argues that China's economy needs to grow at more than 6% per year to absorb the about 24 million workers joining the labor force every year): The Rising Risk of a Hard Landing in China: The Two Engines of Global Growth – U.S. and China – are Now Stalling

In conclusion the risk of a hard landing in China is sharply rising; a deceleration in the Chinese growth rate to 7% in 2009 - just a notch above a 6% hard landing – is highly likely and an even worse outcome cannot be ruled out at this point. The global economy is already headed towards a global recession as advanced economies are all in a recession and the U.S. contraction is now dramatically accelerating. The first engine of global growth – the U.S. on the consumption side – has now already shut down. The second engine of global growth – China on the production side – is also on its way to stalling. Thus, with the two main engines of global growth now in serious trouble a global hard landing is now almost a certainty. And a hard landing in China will have severe effects on growth in emerging market economies in Asia, Africa and Latin America as Chinese demand for raw materials and intermediate inputs has been a major source of economic growth for emerging markets and commodity exporters. The sharp recent fall in commodity prices and the near collapse of the Baltic Freight index are clear signals that Chinese and global demand for commodities and industrial inputs is sharply falling. Thus, global growth – at market prices – will be close to zero in Q3 of 2008, likely negative in Q4 of 2009 and well into negative territory in 2009. So brace yourself for an ugly and protracted global economic contraction in 2009.

by Calculated Risk on 11/08/2008 08:11:00 PM

From the WSJ: Pelosi, Reid Press for TARP Aid for Auto Industry

House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid sent ... a letter to Treasury Secretary Henry Paulson urging him to assist the Big Three auto makers by considering broadening the $700 billion Troubled Asset Relief Program to help the troubled industry.
...
Though the administration is reluctant to widen the program to cover autos, there has been discussion among Bush officials of expanding use of the $700 billion to buy equity stakes in a range of financial-sector companies, moving beyond just banks and insurers. The focus would be on assisting companies that provide financing to the broad economy, such as bond insurers and specialty finance firms ...

Everyone wants a piece of the TARP.

by Calculated Risk on 11/08/2008 04:27:00 PM

From Bloomberg:Ranieri Becomes Victim of Crisis as Franklin Seized

Lewis Ranieri, who helped create the mortgage-securities market in the 1980s while at Salomon Brothers Inc., became a victim of its collapse after his Houston-based bank was seized.
...
``The residential side was not their problem, it was clearly the commercial side,'' said David Lykken, co-founder of Mortgage Banking Solutions, an Austin, Texas-based consulting firm. ``The reason it took a little longer is because that trailed residential,''

This is a key point: Many of the bank failures will not be directly from residential, but from Construction & Development (C&D) and commercial real estate (CRE) loans.

by Calculated Risk on 11/08/2008 06:35:00 AM

From the National Restaurant Association: NRA research finds majority of operators report sales and traffic declines; expectations at an all-time low level. (hat tip Lyle)

“The September decline in the Restaurant Performance Index was the result of broad-based declines across the index components, with both the Current Situation and Expectations indices falling to record lows,” said Hudson Riehle, senior vice president of Research and Information Services for the Association. “Nearly two out of three restaurant operators reported negative same-store sales and traffic levels in September, while 50 percent expect their sales in six months to be lower than the same period in the previous year.”

“The rapid deterioration in economic conditions is reflected in operator sentiment, with a record 42 percent of restaurant operators saying the economy is currently the number-one challenge facing their business,” Riehle added. “Operators aren’t optimistic about the economy looking forward either, with 50 percent expecting economic conditions to worsen in six months.”

Click on graph for larger image in new window.

Any reading below 100 suggests contraction. This index doesn't have a long history, so it is not surprising that the index is at a record low.

Still the index is between below 100 for 13 consecutive months. It is typical in a recession for consumers to pull back on discretionary spending, and restaurants usually feel the pain acutely.

Note that this was for September. It appears October consumer spending was much worse.

by Calculated Risk on 11/08/2008 12:44:00 AM

Prosperity Bank Acquires All the Deposits of Franklin Bank, S.S.B., Houston, Texas

Franklin Bank, S.S.B., Houston, Texas, was closed today by the Texas Department of Savings and Mortgage Lending, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Prosperity Bank, El Campo, Texas, to assume all of the deposits, including those that exceeded the insurance limit, of Franklin Bank.
...
As of September 30, 2008, Franklin Bank had total assets of $5.1 billion and total deposits of $3.7 billion. Prosperity Bank agreed to assume all the deposits, including the brokered deposits, for a premium of 1.7 percent. In addition to assuming all of the failed bank's deposits, Prosperity Bank will purchase approximately $850 million of assets. The FDIC will retain the remaining assets for later disposition.
...
The FDIC estimates that the cost of today's transaction to its Deposit Insurance Fund will be between $1.4 billion and $1.6 billion.

Pacific Western Bank Acquires All the Deposits of Security Pacific Bank, Los Angeles, California

Security Pacific Bank, Los Angeles, California, was closed today by the Commissioner of the California Department of Financial Institutions, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Pacific Western Bank, Las Angeles, California, to assume all of the deposits of Security Pacific.
...
As of October 17, 2008, Security Pacific had total assets of $561.1 million and total deposits of $450.1 million. Pacific Western agreed to assume all the deposits for a two percent premium. In addition to assuming all of the failed bank's deposits, Pacific Western will purchase approximately $51.8 million of assets. The FDIC will retain the remaining assets for later disposition.
...
The FDIC estimates that the cost to the Deposit Insurance Fund will be $210 million.

by Calculated Risk on 11/07/2008 07:31:00 PM

This is interesting from Bloomberg: China Minister Xie Leaves Peru Early to Fix Economy

China's Finance Minister Xie Xuren was called back from an international economic conference in Peru before the meeting began, following orders from Beijing to help resolve problems at home, an organizer of the event said.
...
``They told him he has to resolve an economic problem and that he's the only one who could do so,'' de Swinnen said. ``He was complaining because he had to fly 32 hours to get here and then he had to fly another 32 hours to get back.''

From Bloomberg: China's Economic Growth May Slump as Spending Comes Too Late

Gross domestic product may advance 7.5 percent or less, the weakest since 1990, according to estimates by Credit Suisse AG, UBS AG and Deutsche Bank AG. Royal Bank of Scotland Plc predicts the economy will grow 8 percent next year, while 5 percent ``can't be ruled out.''
...
``The golden years have shuddered to a dramatic halt,'' said Stephen Green, head of China research at Standard Chartered Bank Plc in Shanghai. Green is reviewing his 7.9 percent forecast for next year because a ``big fiscal policy package'' hasn't arrived.

And what happens to U.S. intermediate and long rates when China tries to stimulate their own economy? That could have a serious negative impact on the U.S.

by Calculated Risk on 11/07/2008 05:57:00 PM

From Reuters: Moody's cuts MBIA Insurance to "Baa1"

Moody's Investors Service on Friday cut its ratings on MBIA insurance arm and also sent ratings on the holding company's debt into junk territory, citing diminished business prospects and a weaker financial profile.

This follows a rating cut for AMBAC earlier this week.

by Calculated Risk on 11/07/2008 04:15:00 PM

From Bloomberg: Bloomberg Sues Fed to Force Disclosure of Collateral

Bloomberg News asked a U.S. court today to force the Federal Reserve to disclose securities the central bank is accepting on behalf of American taxpayers as collateral for $1.5 trillion of loans to banks.

The lawsuit is based on the U.S. Freedom of Information Act ...

``The American taxpayer is entitled to know the risks, costs and methodology associated with the unprecedented government bailout of the U.S. financial industry,'' said Matthew Winkler, the editor-in-chief of Bloomberg News ...

Seems like information that should be available. The "confidential commercial information" argument seems weak.