Real Estate Bust, Round II

As I mentioned in an earlier blog entry, once the commercial real estate boom crashes, we're in for some real trouble. Doug French at LRC tells us why.

For those thinking that the real estate bust is all over with – think again. The residential market has hit the ditch and continues to sink lower, but now the commercial property market is rolling over and will take many lenders down the drain with it. America’s small and regional bankers are pointing their fingers at the big banks, claiming the big money center banks "have tarred and feathered us," City National Bank chief executive Bill McQuillan told the Wall Street Journal during the Independent Community Bankers of America convention in Phoenix. But banks – large and small – all over the country are loaded with commercial real estate loans, and that collateral is heading south according to a Deutsche Bank report.

The folks at Deutsche Bank see price declines of 35 to 45 per cent and maybe more in commercial property, due to the large number of loans coming due between now and 2012 that will not be able to be refinanced. Not only are loan delinquency rates up and rents down, but the go-go years of aggressive loan underwriting are gone. The interest only, high low-to-value loans that drove capitalization (cap) rates to the five percent range are history. Property buyers who are required to put more money down will offer significantly less for the same net operating income to achieve the required return on investment. Thus, cap rates for properties in Las Vegas, for instance, are closing in on 9 percent according to a local appraiser and may be one their way to 10 percent.

But bankers are in a state of denial, according to real estate pro Andy Miller, who spoke at Doug Casey’s Crisis & Investment Summit in Las Vegas recently. Miller’s been in the business for 30 years and hasn’t seen a property financing market this tight. But the current note holders are saying "don’t worry, be happy." Miller told the capacity Casey crowd that bankers show him the door when he rains on their parade.

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