by Calculated Risk on 7/28/2009 03:24:00 PM

From the SF Gate: S.F. tower's owners will forfeit it to lender (ht John, Jay)

The owners of a premier San Francisco office tower plan to forfeit the property to their lenders, the city's second distressed transaction involving a major commercial building in recent weeks ...

Hines and Sterling American Property decided to transfer their interest in 333 Bush St. to the original financers, following the surprise dissolution of law firm Heller Ehrman in September ... The 118-year-old law firm defaulted on its 250,000-square-foot lease, leaving the nearly 550,000-square-foot property 65 percent vacant.

... Hines and Sterling bought the tower for $281 million in 2007, near the top of the market, when it was 75 percent leased.

The partnership is handing the property to Brookfield Real Estate Finance and Munich Hypo Bank ...
...
More distressed deals are expected. Nearly three-quarters of Class A office buildings downtown sold between 2005 and 2007 ...

Probably another half off sale (or worse) coming up. It is amazing that 75% of downtown San Francisco Class A office building were sold between 2005 and 2007.

Walking away in the City by the Bay will become common. At least it's a nice place to take a walk ...

by Calculated Risk on 7/28/2009 12:36:00 PM

From San Francisco Fed President Janet Yellen: Outlook for the U.S. Economy and Community Banks. A few excerpts:

[T]he normal dynamics of the business cycle are turning more favorable. Some sectors are poised to rebound simply because they have sunk so low. For example, the auto industry has cut production so far that inventories have begun to shrink, even in the face of historically weak demand. Just slowing the pace of inventory liquidation will bolster economic activity. This story holds for many sectors of the economy where spikes in inventories occurred as cautious consumers cut back on purchases of durable goods, and businesses slashed spending on equipment and software. Looking forward, the demand for houses and durables should also eventually revive as old and broken-down goods need to be replaced. The resulting demand will help the economy recover.

But that recovery is likely to be painfully slow. History teaches that it often takes a long while to recover from downturns caused by financial crises. Financial institutions and markets won’t heal overnight. And it will take quite some time before households have repaired their tattered finances. Until recently, households were saving less and borrowing more in response to wealth gains in both stocks and housing. This pattern made their balance sheets vulnerable to adverse developments and the crashes in both house and stock prices during the last two years destroyed trillions of dollars of their wealth. Not surprisingly, the personal saving rate has now shot higher and I expect to see subdued consumer spending for some time. The unprecedented global nature of the recession also will act as a drag. Countries recovering from financial crises often receive a boost from foreign demand, but neither the United States nor its trading partners can count on such external stimulus this time.

A gradual recovery means that things won’t feel very good for some time to come. The unemployment rate currently is 9½ percent, and this figure is likely to rise further. Moreover, even after the economy begins to grow, it could still take several years to return to full employment. The same is true for capacity utilization in manufacturing, which has declined so far that it has fallen “off the charts”—now standing at its lowest level in the postwar period.

Finally, even though downside risks to the outlook have diminished, there remains some chance that economic conditions could turn out worse than what I’ve sketched. High on my worry list is the possibility of another shock to the still-fragile financial system. Commercial real estate is a particular danger zone...

And on community banks:

Now let me turn to the business environment facing banks. The industry is going through one of the most difficult periods in modern times. ... Bank profits are down, loan delinquencies are up, and failures are climbing.

... Recessionary effects normally take some time to work their way through loan portfolios. So, even though I expect economic growth to resume in the second half of this year, banking conditions are likely to remain quite weak for another year or two.

To date, the community banks under greatest financial stress are those with high real estate concentrations in construction and land development lending. Banks that liberally funded speculative housing and condominium construction, and those that funded land acquisition and development, have been hardest hit. Over 20 District financial institutions have failed since last year. The vast majority of them had high concentrations in residential construction and development lending. In fact, these banks had construction loans that averaged about 40 percent of their loan portfolio, well above the District average of 16 percent. Unfortunately, some banks that aggressively pursued these loans had weak appraisal and risk-monitoring systems.

The next area of significant vulnerability for the banking system, particularly for community and regional banks with real estate concentrations, is income-producing office, warehouse, and retail commercial property. Market fundamentals in most western states are deteriorating. Vacancy rates are rising and rent pressures are hurting property cash flows. Office vacancy rates in both Boise and Portland are expected to reach or exceed 20 percent over the next year or two, the highest rates these cities have seen in many years. Retail shopping centers are struggling with falling occupancy rates and pressures to grant rent concessions. Property values are falling sharply across wide areas of the country, including the Pacific Northwest. Some analysts forecast that commercial property values could experience falls similar to housing of 30 to 40 percent.
...
Our biggest concern now is with maturing loans on depreciated commercial properties. In many cases, borrowers seeking to refinance will be expected to provide additional equity and to have underwriting and pricing adjusted to reflect current market conditions. In some cases, borrowers won’t have the resources to refinance loans.

by Calculated Risk on 7/28/2009 10:48:00 AM

Case-Shiller released the May house price index this morning, and most news reports focused on the small increase, not seasonally adjusted (NSA), from April to May. As I noted earlier, the seasonally adjusted (SA) data showed a small price decline from April to May.

Case-Shiller reported that prices fell at a 2.5% annual rate in May (SA).

However I think the seasonal factor might be insufficient during the current period.

The following graph shows the month-to-month change of the Case-Shiller index for both the NSA and SA data (annualized). Note that Case-Shiller uses a three-month moving average to smooth the data.

Click on graph for larger image in new window.

The Blue line is the NSA data. There is a clear seasonal pattern for house prices.

The red dashed line is the SA data as provided by Case-Shiller.

The seasonal adjustment appears pretty good in the '90s, but it appears insufficient now. I expect that the index will show steeper declines, especially starting in October and November.

The second graph compares the Case-Shiller Composite 10 SA index with the Stress Test scenarios from the Treasury (stress test data is estimated from quarterly forecasts).

NOTE: I'm now using the Seasonally Adjusted (SA) composite 10 series.

The Stress Test scenarios use the Composite 10 index and start in December. Here are the numbers:

Edit correction: All data for May.

Case-Shiller Composite 10 Index, May: 151.13

Stress Test Baseline Scenario, May: 150.85

Stress Test More Adverse Scenario, May: 143.81

So far house prices are tracking the baseline scenario, but I believe the seasonal adjustment is insufficient and prices will decline faster in the Fall.

by Calculated Risk on 7/28/2009 09:41:00 AM

Just a note to the previous post.

Case-Shiller has released the Seasonally Adjusted house price index.

Prices fell slightly in May (compared to April) for the Composite 10 and Composite 20 indexes.

Seasonally adjusted, prices fell in 12 of the 20 Case Shiller cities.

There is a strong seasonal pattern to house prices, and it is important to use the SA data. Unfortunately Case-Shiller did not release the SA data earlier this morning. This has lead to numerous incorrect headlines about prices increasing from April to May. That is correct, if they mention the data is Not Seasonally Adjusted.

by Calculated Risk on 7/28/2009 09:00:00 AM

Important Note: Case-Shiller hasn't released the Seasonally Adjusted data yet for May. There is a strong seasonal pattern for prices and this is the NSA data.

S&P/Case-Shiller released their monthly Home Price Indices for May this morning.

This monthly data includes prices for 20 individual cities, and two composite indices (10 cities and 20 cities). Note: This is not the quarterly national index.

Click on graph for larger image in new window.

The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 33.3% from the peak, and up slightly in May.

The Composite 20 index is off 32.3% from the peak, and up slightly in May.

NOTE: This is the NSA data, prices probably fell using the SA data.

The second graph shows the Year over year change in both indices.

The Composite 10 is off 16.8% over the last year.

The Composite 20 is off 17.1% over the last year.

This is still a very strong YoY decline.

The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

Prices increased (NSA) in 14 of the 20 Case-Shiller cities in May. In Phoenix, house prices have declined 54.5% from the peak. At the other end of the spectrum, prices in Dallas are only off about 8% from the peak. Prices have declined by double digits almost everywhere.

I'll compare house prices to the stress test scenarios soon.