"Crisis of Unprecedented Proportions" Coming in Commercial Real Estate

Randall Zisler of Zisler Capital Partners warns of a "crisis of unprecedented proportions" looming in commercial real estate. His report was picked up in California Controller John Chiang's November review of state finances, as well as by news services Dow Jones and Bloomberg, and Wall Street pundit Art Cashin (of UBS). Zisler's words: "Of the $3 trillion of outstanding mortgage debt, $1.4 trillion is scheduled to mature in four years. We estimate another $500 billion to $750 billion of unscheduled maturities (e.g. defaults). Unfortunately, traditional lenders of consequence are practically out of the market and massive amounts of maturing debt will not easily find refinancing." Much of the debt is worth 50% of par, and many regional and community banks will become insolvent, says Zisler.

Cashin points out that state tax collections dropped 16.6% in the second quarter, the second straight quarter in which revenues fell more sharply than during any previous time on record. A full 49 states saw total tax revenue decline in the most recent quarter, and 36 had double-digit (10% or more) drops.

The Journal's lead sub-headline Tuesday morning was "Cheap Money Sends Shares to 2009 High" -- a stark warning that liquidity is buoying various markets, not reality. The Federal Reserve promises to keep interest rates around zero for the indefinite future. This emboldens investors to gamble. Wall Streeters sell the dollar and buy everything else -- stocks, bonds, commodities and non-dollar currencies. Almost on an hour by hour basis, stocks rise as the dollar drops, and vice versa. But when everybody is on one side of the boat -- watch out.

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Cashin points out that state tax collections dropped 16.6% in the second quarter, the second straight quarter in which revenues fell more sharply than during any previous time on record. A full 49 states saw total tax revenue decline in the most recent quarter, and 36 had double-digit (10% or more) drops.

Didn't the state tax collectors hear-the recession is "over", at least according to Ben Bernanke.

The problem with commercial real estate is that although the loans are ammortized over 25, 30 years just like residential property, they have call dates 5-7 years out-which means you have to refinance commercial property on a regular basis, usually every 5 years.

Combine that with the fact that the capital markets are still not working to get credit flowing again and we have problems. We can only hope the credit freeze eases up over the next 2 years.

Response to post #1: But the banks are mainly making loans for M&A, leveraged buyouts, and the like -- non- and counter-productive activities that enrich only a handful of people, including the Wall Streeters. The government only wants the banks recapitalized; it doesn't care how they get there. So banks borrow at zero and gamble. Hedge funds get loans for close to zero and gamble. Will financial institutions finance commercial real estate deals? What's your guess? Best, Don Bauder

The commercial banks will have to start financing commcerial properties-they won't have a choice, except to foreclose-and they sure don't want to do that.

If you're a commcerical bank, like BofA, and a loan on a big commercial property is coming due and you refuse to refinance and the owner cannot get financing elsewhere, the only option left would be to foreclise-and BofA, CitiBank, US Bank and other big commercial banks-they don't want or need that kind of brain damage. Commercial banks will be forced to start giving out credit-at least to their own cusotmers because it is either that or foreclosure=they won't have any other choices.

I am sure the investment banks will just be out gambling on whatever equity deals they think they can make money on-fully leveraged to the hilt.

I was listening to a BusinessWeek podcast yesterday, where an economist said that the bank "stress tests" that the government did this past year, "did not include commercial mortgages." They totally ignored the fact that banks and especially the smaller (not-too-big-to-fail) banks are carrying these mortgages at par, when the fair market value is much less. - Of course, if we valued banks are their true values and marked assets to market, then the majority would be under capitalized and insolvent. - Let the fiction continue!

Response to post #5: I knew that the stress tests were widely considered phony as a three-dollar bill, but I did not know that they excluded commercial mortgages. If that's true, it represents government fraud. And yes, if these assets were marked to market, as they should be, many financial institutions would be insolvent. Best, Don Bauder

Response to post #3: Your scenario smacks of a Hobson's choice. It is not pleasant. Best, Don Bauder

Anyone who thinks we're at the end, or even middle, of this economic crisis...they're not paying attention.

We're still at the beginning. A year after the Wall Street bailout nothing has changed. The scammers were rewarded, the honest people were punished.

Commercial real estate is overpriced, overbuilt and overleveraged. A lot like the rest of our economy.

Until there are fundamental changes to our system, changes that give everyone a fair chance instead of rigging the game to benefit only the oligarchs at the top, our economy will continue to slide.

Nobody in power at the local, state, or federal level has any incentive to make these kinds of changes. In the bubble they inhabit, this is all a little blip we'll endure until things return to "normal".

Well, what we were taught is "normal" has actually been a long-term ponzi scheme, impovershing all but the few. The oligarchs sucking up the power and the money have become multi-generational entities, well along the path of upgrading themselves to aristocrats.

Plato described the cyclical changes in government: going from anarchy to despotism, then oligarchy, democracy, and back to anarchy again.

Somehow we have reversed this. We've gone from democracy to oligarchy.

It's no wonder some fear despotism is next for America. So long as both the economy and the government remain in the hands of the oligarchs, they may be right.

Fred is correct-but I think we are more in the middle of the downturn than the begining.

I still say the downturn will end in Nov/Dec, 2010.

Response to post #7: The little people are getting the short end of the stick in many ways. 1. It's their tax money paying for the bailouts of the big banks, big auto companies, etc.; 2. The unemployment rate keeps rising because companies, encouraged by Washington, are more interested in boosting profits and their stock prices than they are in rehiring people; 3. The little people can't get the zero interest rates that the big institutions can get; 4. The low interest rates punish savers who can't get decent interest rates on CDs, etc. Even under Obama, Washington's interest is saving the big boys, many of whom should be going to prison instead of getting bailed out. Best, Don Bauder

Response to post #8: The National Bureau of Economic Research, the arbiter on such matters, will probably say (next year) that the recession ended in the second half of this year. But I feel that practically, it won't end until hiring resumes. That may be a long way off. Best, Don Bauder

Wow Ponzi-great article and graphs.

O bow down to that info with respect.

Someone please email it over to JW at the Sheriff's office and JF over at the SDFD.

Response to post #11: That is staggering information, clearly presented. Michael Mandel of Business Week is an excellent economist. In the late 1990s, he saw the tech crash coming. He was almost alone among economists. I had the honor of working with him once or twice when I was on Business Week, which would have been at least 36 years ago, probably more. Best, Don Bauder

Response to post #12: Agreed. Great information. Incidentally, Ben Bernanke gave a generally rosy view of the economy today (Nov. 12) in a New York speech, but he admitted that commercial real estate was in real trouble. Best, Don Bauder

Incidentally, Ben Bernanke gave a generally rosy view of the economy today (Nov. 12) in a New York speech...

And how much did his nose grow?????

He is a liar/incompetent. None those Goldman Sachs clowns should be anywhere near the Fed/Treasury. They're the problem, not the solution.

Response to post #15: Bernanke gets up and gives a rosy report, then says he will keep interest rates at zero for the indefinite future. Doesn't anybody ask why? You would think that savers, who are getting such low interest rates, would raise the question. Another one that puzzles me: In 2008, we were told that we had to rescue AIG, Fannie, Freddie, Bank of America, Citigroup, ad nauseam because they were so interconnected with other institutions that the whole world's financial system would unravel if we didn't pump trillions of dollars into them. But if that was true, if the situation was so grim then, why haven't we done anything about it? Why haven't we demanded that the "too big to fail" institutions be broken up? Why haven't we told financial institutions to unwind the derivatives that almost drove us off a cliff? It is amazing how officials can have it both ways and only a few journalists will challenge the statements. One good thing about Bernanke: he did not come from Goldman Sachs. Best, Don Bauder

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