by Calculated Risk on 3/04/2009 09:30:00 PM

There was a strong downward revision in non-residential structure investment in the Q4 GDP report. The CRE investment bust is here - and will get much worse based on the Fed's recent Senior Loan Officer Opinion Survey and the Architecture Billings Index.

Click on graph for larger image in new window.

This graph shows investment in lodging (based on data from the BEA) as a percent of GDP. The recent boom in lodging investment has been stunning. Lodging investment is now at 0.33% of GDP - slightly below the all time high set in Q3 2008 - and preparing to cliff dive!

Note: prior to 1997, the BEA included Lodging in a category with a few other buildings. This earlier data was normalized using 1997 data, and is an approximation.

Investment in multimerchandise shopping structures (malls) decreased in Q4 2008 to .21% of GDP, after peaking in Q4 2007 at .25% of GDP. This is a pretty steep decline, but now it appears that new mall construction is about to almost stop.

As David Simon, Chief Executive Officer or Simon Property Group, the largest U.S. shopping mall owner said a few weeks ago:

"The new development business is dead for a decade. Maybe it’s eight years. Maybe it’s not completely dead. Maybe I’m over-dramatizing it for effect."

The third graph shows office investment as a percent of GDP since 1972. Office investment decreased slightly in Q4 2008. With the office vacancy rate rising sharply, office investment will probably decline all this year.

Note: In 1997, the Bureau of Economic Analysis changed the office category. In the earlier years, offices included medical offices. After '97, medical offices were not included (The BEA presented the data both ways in '97).

Investment in all three categories - malls, lodging and offices - will decline sharply in 2009.

by Calculated Risk on 3/04/2009 08:04:00 PM

From Atlanta Fed President Dennis Lockhart: On Real Estate and Other Risks to the Economic Outlook A few excerpts. First on the rental market:

I should also comment on the weakening multifamily residential real estate picture. No two rental markets are exactly alike. But to generalize, those markets trending the worst probably share one or more characteristics. They had excessive condo construction or condo conversion activity. Such markets are seeing unsold units return as rentals. They had very high home price appreciation in the years 2004—07 with large amounts of speculative house construction activity. Today, in several markets, houses compete with apartments as rentals. And they have been experiencing high and rising foreclosure rates.

Although Lockhart mentioned that houses are competing with apartments as rentals, he doesn't mention that this is happening for two reasons: 1) homeowners who can't sell their homes (or are "waiting for a better market") are renting their homes, and 2) many REOs are being purchased by cash flow investors as rentals helping to increase rental supply and push down rents.

And on Commercial real estate (CRE):

While historically smaller than residential real estate, commercial real estate (or nonresidential structures) accounts for a not-insignificant portion of the American economy—at least 4 percent of GDP directly and perhaps more, depending on estimates. ...

There are currently some $2.5 trillion of commercial property loans on the balance sheets of financial institutions and in commercial mortgage-backed securities (CMBS) markets. In contrast, residential mortgage debt amounts to about $11 trillion.

Some 25 percent of commercial real estate debt is securitized, compared with 60 percent of outstanding home mortgage debt. The volume of CMBS has more than doubled since 2003, a bit faster than the growth of overall commercial real estate debt.

This is good data. Although the CRE bust will be significant, it will not be as large an impact as the residential bust.

There are several subsectors of commercial real estate: retail, office, hotel, and industrial. All are facing problems.

There is a growing imbalance of retail space for several reasons. A lot of new retail space was added in areas that saw a high level of home construction, much of which has not been absorbed.

This imbalance is aggravated by general weakness in the retail industry. Established retail centers are seeing rising vacancy rates. When an anchor tenant leaves a shopping center, or overall occupancy falls below a threshold level, other tenants are often free to cancel their leases. Industry data indicate that abandoned retail store expansions and store closings have reached levels not seen since the recession and real estate slump of 1991–92.

The hotel subsector is facing excess supply in the face of soft demand. Occupancy rates declined about 8 percentage points in the fourth quarter of 2008, according to industry sources. Summer tourism was hurt by high gas prices, and now business travel is declining as companies scale back in a weak economy.

Also, with the decline in the economy and rising unemployment, office and industrial vacancies have been rising. In virtually all segments of commercial real estate, there is downward pressure on property values because of new construction coming on stream—construction started before the recession fully set in—coupled with the effects of the economic downturn.

Interestingly, the only property type currently withstanding downward pressures is warehouse. This seems to be, perversely, at least partly because of the back-up of inventories resulting from weak consumer spending and adverse retail and manufacturing conditions.

This gives me an excuse, in the next post, to update the graphs of office, mall and hotel investment based on the revisions to Q4 GDP.

by Calculated Risk on 3/04/2009 06:19:00 PM

I'm back from my civic duty, and starting to read the newly released details of the Mortgage Modification Plan. The second mortgage sections are interesting.

This first reference to 2nd liens seems to be part of Home Affordable Refinance Program (Part I of the plan).

From the Making Home Affordable, Updated Detailed Program Description Fact Sheet

Second Liens: While eligible loan modifications will not require any participation by second lien holders, the program will include additional incentives to extinguish second liens on loans modified under the program, in order to reduce the overall indebtedness of the borrower and improve loan performance. Servicers will be eligible to receive compensation when they contact second lien holders and extinguish valid junior liens (according to a schedule to be specified by the Treasury Department, depending in part on combined loan to value). Servicers will be reimbursed for the release according to the specified schedule, and will also receive an extra $250 for obtaining a release of a valid second lien.

So the 2nd lien holder will have a choice: do nothing, or take some unspecified compensation to extinguish the 2nd.

Then there is this section that seems to be in Part II: Home Affordable Modification Program Housing Counselor Q&As:

What if the borrower has a second mortgage and would like to apply for a Home Affordable Modification?

Under the Home Affordable Modification program, junior lien holders will be required to subordinate to the modified loan. However, through the Home Affordable Modification an incentive payment of up to $1,000 is available to pay off junior lien holders. Servicers are eligible to receive an additional $500 incentive payment for efforts made to extinguish second liens on loans modified under this program.

Is that saying they will pay the 2nd holder up to $1000 under Part II?

Note: Part I is the section allowing homeowner with Fannie and Freddie held mortgages to refinance upto 105% LTV. This section makes sense since this lowers Fannie and Freddie's risk on loans they already own or guarantee. Under Part II the lender must bring the total monthly payments on mortgages to 38% of the borrowers gross income, and then the U.S. will match dollar for dollar from 38% down to 31% debt-to-income ratio for the borrower.

by Calculated Risk on 3/04/2009 05:00:00 PM

From the LA Times: As projects grind to a halt, home sites turn to wasteland

By day, it's far too quiet at the site of a planned housing and retail development on a former Navy base in Oakland.

At night, neighbors can hear the thieves come out.

They rip out copper wire, haul away pipes and take anything else they can steal from dozens of buildings on the site, abandoned after Irvine developer SunCal Cos. fell victim to the economy.

It's a scene not uncommon throughout California...

"I hear hacking and see scary bonfires in the middle of the night," said Don Johnson, a retired Coast Guard employee who lives near the defunct Oak Knoll Naval Medical Center in Oakland.

Nearly 250 residential developments with a combined total of 9,389 houses and condominiums have been halted in California, according to research firm Hanley Wood Market Intelligence. The units, worth close to $3.5 billion, were in various stages of development.

Some of these units have been mothballed (with fences and guards), others essentially abandoned. This is just more supply waiting for the market to improve.

by Calculated Risk on 3/04/2009 03:59:00 PM

The Fed may say the economy has weakened (see Beige Book), but the markets rebounded today ...

Dow up 2.2%

S&P 500 up 2.4%

NASDAQ up 2.5%

Back to full posting later today ...