by Calculated Risk on 6/15/2009 11:56:00 AM

Fitch: Multifamily & Retail Defaults Drive U.S. CMBS Delinquencies Past 2%

Large loan defaults coupled with declining performance on multifamily and retail properties resulted in a 29 basis point (bp) climb to 2.07% for U.S. CMBS delinquencies in May, according to the latest Fitch Ratings Loan Delinquency Index. This marks the highest percentage of delinquencies since Fitch began its Index in 2001.

"Defaults on larger loans continue to drive delinquency increases because later vintage transactions have larger loans, many underwritten with now unrealized proforma income, as well as now-depleted debt service reserves and high leverage," said Managing Director and U.S. CMBS group head Susan Merrick.
emphasis added

Some CRE loans were based on overly optimistic proforma income (aka wishful thinking like stated income), and the loans included reserves to pay interest until rents increased (like a negatively amortizing option ARM). When the reserves run dry, and the proforma income is "unrealized", the borrower defaults.

And by sector:

Declining performance, particularly in oversupplied markets, as well as in secondary and tertiary markets, has pushed the multifamily delinquency rate to 4.55%, the highest of all property types. Multifamily properties have been highly susceptible to default in CMBS during the current economic downturn.

The 60 days or more delinquency rate for retail properties is slightly higher than the index at 2.24%.
...
Loans backed by hotels have thus far withstood economic pressures and continue to slightly outperform the Index with a 1.91% delinquency rate.

by Calculated Risk on 6/15/2009 10:56:00 AM

From Bloomberg: Extended Stay Hotels Chain Declares Bankruptcy in New York

Extended Stay Hotels ... which has more than 680 properties, said it had $7.1 billion in assets and $7.6 billion in debts at the end of last year. The company employs approximately 10,000 ...

Hotel occupancy is off more than 10% compared to last year - and revenue per available room off more than 20% - a very difficult operating environment, especially for hotel chains laden with debt.

Added: Some background from the WSJ :

Wachovia, Bear Stearns and others lent Lightstone founder David Lichtenstein $7.4 billion so he could buy the 684-hotel chain from Blackstone Group for $8 billion in April 2007. Mr. Lichtenstein, with help from Arbor Realty Trust, put in about $600 million. He estimated earnings were around $575 million, meaning the deal was levered at nearly 13 times -- high even for that era.

Much of the debt in the 2007 buyout of Extended Stay was converted into commercial mortgage-backed securities, or CMBS ...

The hotel chain has $4.1 billion in a senior first mortgage that was mostly sold to investors as CMBS. Behind those secured creditors is the $3.3 billion of mezzanine debt divided into 10 classes ranked one through 10 in seniority. Most of the holders of junior mezzanine debt bought at a discount, some around 60 cents on the dollar, but others as low as 10-15 cents, say debt holders. Both the senior and mezzanine loans mature June 12, with extension options.

by Calculated Risk on 6/15/2009 08:38:00 AM

From the NY Fed: Empire State Manufacturing Survey

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to deteriorate in June, at a moderately faster pace than in May. The general business conditions index fell 5 points, to -9.4. The new orders index remained negative and near last month’s level, while the shipments index fell 6 points to -4.8.
...
In a series of supplementary questions, manufacturers were asked about their capital spending plans for 2009 relative to their actual spending for 2008, both overall and for a few broad categories of capital (see Supplemental Report tab). Similar questions had been asked in June 2008 and June 2007. In the current survey, 56 percent of respondents reported reductions in overall capital spending in 2009, while just 20 percent reported increases. These results contrast fairly markedly with those of the June 2008 survey, which showed nearly as many respondents reporting increases (32 percent) as decreases (36 percent).

Here is the general business conditions index. Note that the data only goes back to July 2001 (chart to Jan 2002). Any reading below zero is contraction, so this index shows manufacturing is contracting in June.

by Calculated Risk on 6/15/2009 12:06:00 AM

From Paul Krugman in the NY Times: Stay the Course

The debate over economic policy has taken a predictable yet ominous turn: the crisis seems to be easing, and a chorus of critics is already demanding that the Federal Reserve and the Obama administration abandon their rescue efforts. For those who know their history, it’s déjà vu all over again — literally.

For this is the third time in history that a major economy has found itself in a liquidity trap ...

The first example of policy in a liquidity trap comes from the 1930s. The U.S. economy grew rapidly from 1933 to 1937, helped along by New Deal policies. America, however, remained well short of full employment.

Yet policy makers stopped worrying about depression and started worrying about inflation. The Federal Reserve tightened monetary policy, while F.D.R. tried to balance the federal budget. Sure enough, the economy slumped again, and full recovery had to wait for World War II.

The second example is Japan in the 1990s. After slumping early in the decade, Japan experienced a partial recovery, with the economy growing almost 3 percent in 1996. Policy makers responded by shifting their focus to the budget deficit, raising taxes and cutting spending. Japan proceeded to slide back into recession.

And here we go again.
...
To sum up: A few months ago the U.S. economy was in danger of falling into depression. Aggressive monetary policy and deficit spending have, for the time being, averted that danger. And suddenly critics are demanding that we call the whole thing off, and revert to business as usual.

Those demands should be ignored. It’s much too soon to give up on policies that have, at most, pulled us a few inches back from the edge of the abyss.

Let me add I think the "green shoots" metaphor we keep hearing is wrong. That implies new growth and some sort of immaculate recovery. Yes, right now the pace of contraction appears to have slowed - and that is good news - but even if we are nearing the bottom of the economic cliff, the eventual "recovery" will be very sluggish.

As I've written over and over (see A Return to Trend Growth in 2010? and The Impact of Changes in the Saving Rate on PCE ), the usual engines of recovery - personal consumption expenditures (PCE) and residential investment (RI) - will both remain under pressure (even if they show some sluggish growth).

The end of cliff diving is not the same as new growth.

And look at the unemployment rate ...

UPDATE: ht Geoff at Innocent Bystanders

Click on graph for larger image in new window.

This graph compares the actual quarterly unemployment rate (in red) with the Obama economic forecast from January 10th: The Job Impact of the American Recovery and Reinvestment Plan

If anything the situation is worse than expected, not better.

by Calculated Risk on 6/14/2009 08:06:00 PM

From the WSJ: Maguire Sells Office Site at 40% Off (ht Ron)

Maguire Properties Inc ... sold a newly developed office building in Irvine, Calif., for about $160 million, a price representing an estimated 40% discount to its construction cost.
...
Emmes Group of Cos. ... purchased the 19-story building, which was completed in 2007 and is about 60% leased. ...

The building ... was originally slated to be anchored by [subprime lender] New Century Financial Corp. ... The building is roughly estimated to have cost about $500 a square foot, according to Michael Knott, a senior adviser with Green Street Advisors in Newport Beach, Calif. Emmes's price was about $300 a square foot.

Quite a haircut. New Century still causing damage ...

by Calculated Risk on 6/14/2009 03:40:00 PM

Here is an interesting short discussion on reusing mall space from Rob Walker in the NY Times Magazine: Repurpose-Driven Life

Talk of American infrastructure tends to focus on inadequacies: roads that need to be repaired or widened, bridges fortified, electrical grids updated. All the more striking, then, that America’s retail infrastructure — its malls, supercenters, big boxes and other styles of store-clumping — has come to be characterized by rampant abundance. This has been a decades-long trend. But it has taken the economic downturn, with chain stores liquidating, mall tenancy slipping and car dealerships scheduled for closure, to focus popular attention on the problem with our retail infrastructure: there is too much of it.

A recent book, “Retrofitting Suburbia,” by Ellen Dunham-Jones and June Williamson, notes that in 1986, the United States had about 15 square feet of retail space per person in shopping centers. That was already a world-leading figure, but by 2003 it had increased by a third, to 20 square feet. The next countries on the list are Canada (13 square feet per person) and Australia (6.5 square feet); the highest figure in Europe is in Sweden, with 3 square feet per person.

And that was in 2003 - before the most recent mall building boom began (see graph at bottom).

From Italian cartoonist Giovanni Fontana (used with permission). Here is his website, the vignettist's corner Click on cartoon for larger image in new window.

Of course the housing bubble in the U.S. was much large than the mall bubble.

In 2005, investment in single-family structures hit a peak of $481 billion (all residential investment including multi-family and home improvement was $761 billion in 2005.)

Investment in malls peaked at $32.5 billion in 2007. So the mall bubble isn't anywhere near as big as the housing bubble in absolute numbers or potential negative impact on the overall economy.

Here is a graph of mall investment through Q1 2009 as a percent of GDP based on data from the BEA ...

Investment in multimerchandise shopping structures (malls) peaked in Q4 2007 and is continuing to decline.

Note that the article above stated there were 20 square feet of retail space per person in shopping centers in 2003 - and that was before the more recent building boom. There is just too much retail space in the U.S.

by Calculated Risk on 6/14/2009 02:17:00 PM

Way back in 2005 I stated the obvious:

"Of all the areas experiencing a housing boom, the areas most at risk have had the greatest increase in real estate related jobs. These jobs include home construction, real estate agents, mortgage brokers, inspectors and more.
...
Not surprisingly, California has become more dependent on construction than the rest of the country, and construction has really boomed in San Diego. But San Diego has nothing on the Inland Empire.

I believe that areas like the Inland Empire will suffer the most when housing activity slows."

To update the graphs:

Click on graph for larger image in new window.

This graph (using Not Seasonally Adjusted data) shows construction as a percent of total employment for the Inland Empire, California and the U.S.

Although there was a surge in construction employment in the U.S., and about a 50% increase in California (as a percent of total employment), construction employment doubled (as a percent of total employment) in the Inland Empire.

Now construction employment in the Inland Empire - as a percent of total employment - is getting close to the lows of the early '90s.

The second graph shows the percent of construction employment and the unemployment rate for the Inland Empire.

With the housing bust, the percent construction employment has declined sharply and the unemployment rate has risen to around 13% (about the same as Detroit).

by Calculated Risk on 6/14/2009 09:37:00 AM

From The Observer: Paul Krugman's fear for lost decade (ht Jonathan)

A few excerpts:

Krugman: The risk of a full, all-out Great Depression - utter collapse of everything - has receded a lot in the past few months. But this first year of crisis has been far worse than anything that happened in Japan during the last decade, so in some sense we already have much worse than anything the Japanese went through. The risk for long stagnation is really high.

And on the stimulus:

Will Hutton: [I]s Obama doing enough on fiscal policy?

PK: Well we have a stimulus which is a little over 5% of one year's GDP but some of it is not real - something that was going to happen anyway and not very stimulative. So it's really about 4% of GDP of genuine stimulus, but spread over two and a half years. So, it's actually quite a lot less than what I was arguing for.

WH: So, will it be sufficient?

PK: Well, sufficient to actually restore full employment would probably have to be 5% or more. More than we have would certainly be a good thing. It actually might happen. You know, the buzz I'm getting is that a second-round stimulus might well come on the agenda.

by Calculated Risk on 6/13/2009 08:31:00 PM

Earlier I posted that Fitch expects "home prices will fall an additional 12.5% nationally and 36% in California" from Q1 2009.

Here is Eric's take ...

From cartoonist Eric G. Lewis. Click on cartoon for larger image in new window.

by Calculated Risk on 6/13/2009 06:03:00 PM

From Reuters: Geithner: It's Too Soon To Withdraw Economic Stimulus

US Treasury Secretary Timothy Geithner said on Saturday it was too early to start withdrawing stimulus for the world's top economies, but governments should pledge a return to more sustainable fiscal policies in the future.

"Growth should remain the principal focus of policy among the G8 and broader G20 economies," Geithner told a news conference ... He said recovery has not yet arrived, and governments need to keep reinforcing recent improvements in global demand.

"It is too early to shift toward policy restraint," Geithner said
...
Geithner said the "force of the economic storm is receding" he told the BBC in Lecce that he wanted recovery firmly in place before withdrawing stimulus.

"We don't have a world economy that's growing anywhere close to potential yet. We want to see recovery firmly established before we start to get on to the next challenge," he said in the interview.

From NY Times: At Talks, Geithner Defends Stimulus

“Where we have seen improvements, they are the result of the unprecedented scope and intensity of policy actions to support demand and financial repair,” Mr. Geithner said in a statement. “These early signs of improvement are encouraging, but the global economy is still operating well below potential, and we still face acute challenges.”
emphasis added

Despite the "unprecedented scope and intensity of policy actions", the global economy (and U.S. economy) are still in recession, and the so-called "improvements" are that the pace of contraction has slowed. We still have a ways to go.