by Calculated Risk on 7/14/2009 05:06:00 PM

From Reuters: Manhattan office vacancies spike to 4-1/2 yr high (ht Brian)

The overall vacancy rate -- which includes space that will become available over the next six months -- rose 0.9 percentage point from the first quarter to 10.5 percent, the highest rate since the fourth quarter 2004, when it touched 11 percent. ...

Asking rent in the second quarter fell to $60.23 per square foot, down 15.9 percent from a year ago, Cushman said.

Factoring in months of free rent and work space improvements, effective rent in Manhattan already is off 44 percent from the peak in the first quarter 2008.

Sharply lower rents, reduced leverage and much higher cap rates - Brian calls this the "neutron bomb for RE equity"; destroys CRE investors, but leaves the buildings still standing.

by Calculated Risk on 7/14/2009 03:38:00 PM

From Reuters: Obama mulls rental option for some homeowners-sources

Under one idea being discussed, delinquent homeowners would surrender ownership of their homes but would continue to live in the property for several years ... Officials are also considering whether the government should make mortgage payments on behalf of borrowers who cannot keep up with their home loans

And another surge in foreclosure activity is reported today by ForeclosureRadar:

For the third consecutive month, foreclosure sales jumped significantly as lenders come off the moratorium. Foreclosure sales increased by 24.7 percent following a 31.9 percent increase in May, and a 35 percent April increase. Notices of Trustee Sale dropped by an unexpected 28.7 percent, with the timing of the drop indicating that it was in response to the California Foreclosure Prevention Act. This law was widely believed to have little or no impact on foreclosure filings, as it exempted the majority of large lenders that operate in the state.
...
After a 4.2 percent drop the prior month, Notices of Default, the initial step in the foreclosure process, rose by 11.8 percent to the second highest level on record at 45,691 filings. Year-overyear filings increased by 10.0 percent from June of 2008.
...
A total of 22,291 foreclosures were taken to sale at auction, representing loan value of $9.57 Billion dollars; a 24.7 percent increase from the prior month, though 8.2 percent lower than the prior year. The opening bids set by lenders were an average 39.3 percent lower than the loan balance, with 46.0 percent of sales discounted by 50.0 percent or more.
...
A new statistic we are watching closely is the number of properties actively scheduled for sale – meaning that a Notice of Trustee Sale has been filed to set the auction date and time, but the foreclosure has not yet been sold or cancelled. Under California’s foreclosure code, a foreclosure sale can be postponed repeatedly for one year before a new Notice of Trustee Sale has to be filed. While postponements are quite common, they have reached record levels in recent months, swelling the number of scheduled foreclosures 90.1 percent year-over-year to 113,141.
emphasis added

by Calculated Risk on 7/14/2009 02:34:00 PM

Here come some Commercial Mortgage Backed Security (CMBS) rating cuts ...

UPDATE: From Dow Jones: Commercial Mtge-Backed Securities Index Hit By S&P Downgrades-Source

From S&P: S&P Lowers 23 Credit Suisse Comm Mortgage 2007-C3 Rtgs; 3 Afmd

NEW YORK (Standard & Poor's) July 14, 2009--Standard & Poor's Ratings Services today lowered its ratings on 23 classes of commercial mortgage-backed securities (CMBS) from Credit Suisse Commercial Mortgage Trust Series 2007-C3 and removed them from CreditWatch with negative implications...

The lowered ratings follow our analysis of the transaction using our recently released U.S. conduit and fusion CMBS criteria, which was the primary driver of the rating actions....

Here is an example: GSMS 2007-GG10 A4's (super senior with 30% credit support) were taken from AAA to BBB-. That is a significant cut, and below the street expectations.

This is the beginning of the rating cuts associated with the S&P June 4th release of The Potential Rating Impact Of Proposed Methodology Changes On U.S. CMBS

by Calculated Risk on 7/14/2009 12:50:00 PM

From the WSJ: Obama Says Jobless Rate Likely to Tick Up for Several Months

"[How employment numbers are going to respond is not yet clear.]^* My expectation is that we will probably continue to see unemployment tick up for several months," Mr. Obama told reporters ...

Mr. Obama, who has said he believes joblessness will soon hit 10%, will visit Michigan later Tuesday, a state already dealing with double-digit unemployment.

While he said he doesn't have a "crystal ball," Mr. Obama said he anticipates unemployment will follow historical trends and lag "for some time" even after an economic recovery begins.

On the positive side, he said the U.S. has "seen some stabilization in the financial markets, and that's good because that means companies can borrow and banks are starting to lend again."

^*Added quote from AP.

This is probably way too optimistic. Professor Roubini wrote today:

In the U.S., the unemployment rate, currently at 9.5%, is poised to rise above 10% by the fall. It should peak at 11% some time in 2010 and remain well above 10% for a long time.
...
But these raw figures on job losses, bad as they are, actually understate the weakness in world labor markets. If you include partially employed workers and discouraged workers who left the U.S. labor force, for example, the unemployment rate is already 16.5%; even temporary employment is sharply down.
...
Moreover, many employers, seeking to “share the pain” of the recession and slow down the rate of layoffs, are now asking workers to accept cuts in both hours and hourly wages. Thus, the total effect of the recession on labor income of jobs, hours and wage reductions is much larger.

Although no one has a crystal ball, it does appear the unemployment rate will rise well into 2010 - and then stay elevated for some time as the U.S. suffers with another jobless recovery.

by Calculated Risk on 7/14/2009 10:10:00 AM

The Manufacturing and Trade Inventories and Sales report from the Census Bureau today showed more evidence of declining inventories.

Click on graph for larger image in new window.

The Census Bureau reported:

Manufacturers' and trade inventories, adjusted for seasonal variations but not for price changes, were estimated at an end-of-month level of $1,368.1 billion, down 1.0 percent (±0.1%) from April 2009 and down 8.0 percent (±0.4%) from May 2008.

The above graph shows the 3 month change (annualized) in manufacturers’ and trade inventories. The inventory correction was slow to start in this recession, but inventories are now declining sharply.

However, even with the sharp decline in inventories, the inventory to sales ratio has only declined to 1.42 in May - since sales have fallen sharply too.

There has been a race between declining sales and declining inventory. Even as sales start to stabilize (appears to be happening), inventory levels are still too high compared to the lower sales levels, and further inventory reductions are probably coming.