Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Commentary

Commercial Real Estate in the US: A time bomb? (Zero Hedge)

Zero Hedge does it again, with the One Trillion Dollar CRE Time Bomb.

If I really wanted to trap the essence of that article I’d have to post it in full, which is cheating, so please click the above link and read it. Tyler talks about how Commercial Real Estate (CRE) is not just CMBS (Commercial Mortgage Backed Securities) but also direct unsecuritised lending by banks and insurance companies. And how, this exposure will need refinancing, of an order of 1.4 trillion, in the next four years (till 2013). And how refi is a problem in itself because the property values have dropped so much, there is very little probability banks can refinance without taking huge losses (as they have to have a certain Loan to Value maintained). Extending the loan to avoid refinancing is just delaying the problem, and the reasoning to extend itself will not be sound (you usually extend only if the customer, at the end of the extension, will be in a shape to refinance)

The figures are staggering – less than 32% of loans will even qualify for refinancing. And the only hope is, that by 2013, another CRE bubble happens, of a massive variety, which is what the Fed/Treasury combine seem to want. Tyler summarises:

In this light, anything that the government can try to do, absent continuing to print massive amounts of dollars, is irrelevant. The equity market can easily go up indefinitely, short squeezes can be generated at will, TALF can see 10 new, increasingly more meaningless permutations, the administration can prepare worthless stress tests that are neither stressing nor testing, and talk up a storm on cable TV to convince regular investors that all is well, yet none of these will do one thing to provide the banks and CMBS borrowers with the massive capital they will need to plug the value gap either during a CRE loan’s term or at maturity. The multi-trillion problem is simply too massive to be manipulated and is also too large to be simply swept under the carpet for the next administration and generation. It is inevitable that the monster hiding in the closet will have to be addressed head on, and the sooner it happens, the less the eventual destruction of individual and societal net worth (however, it still would be massive). Delaying the inevitable at this point is not a viable option: Zero Hedge hopes the administration realizes this, ironically, before it is too late.

  • Anonymous says:

    >The real Black Swan event is “Swine flu”. Sell your stocks.

  • GG says:

    >This sentence struck me from the article;

    “…the value holes at the time of maturity would have to be plugged with equity from existing borrowers (which, despite what the “stress test” may allege, simply does not exist absent a wholesale banking system nationalization).”

    Well, in India a majority of the banking system is already nationalized, which means that the Indian taxpayer has been supporting all the bad debts created by our corrupt government for quite a while now. Now, I don’t want to sound unpatriotic – because God knows I love my country (but hate its government!) – but the pit where America is headed, India is already there.