Monday, June 22, 2009

CRE - No Uptick Till 2017?

Report out today from the head of Commercial Mortgage-backed Securities and
Asset-Backed Securities Synthetics Research at Deutsche Bank stating that he sees no uptick or recovery in the CMBS Market until 2017.

Deutsche must be short the market. In all seriousness, the report makes some very good points.

The good points:

The froth is still working itself out in the CRE space.

We are currently in something which is comparable to what we saw in the 1990s and
potentially worse.

U.S. commercial real estate values could fall by more than 50 percent from the peak in 2007. - Does BOFA/Morgan Stanley investors know about this before they invested last week in a huge tranche of CRE garbage?

Although asking rents are down about 28 percent in New York, factoring in free rent and other perks by landlords, rents are down about 50 percent.

Have you walked down Madison Avenue of late?

Rents will be back to where they were in 2007 in 2017. Building prices also will take six to eight years to recover

The U.S. commercial markets are deteriorating at an increasing pace as rent dries up and demand plummets. That is leaving borrowers struggling to make their monthly mortgage payments. The number of new loans that are becoming delinquent each
month are defaulting at rates between 5 percent and 8 percent per year, with the most loosely underwritten loans of 2007 defaults at 8 percent per year. That puts accumulated losses at about 4 percent this year, and 12 percent over the next four years. Loans loses ranged between 7 and 11 percent a year during the commercial real estate crash of the early 1990s.

So there is no stability at all happening in the CRE space, yet there are portfolio managers willing to invest hard earned investor money in more CRE garbage.

Maximum Deterioration.

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