Tag Archives: Commercial real estate

Commercial Real-Estate Fallout Even Douses the Queen of England, by Nick Corbishley

The commercial real estate market in the UK is in a bad way, perhaps even in worse shape than the market in the US. From Nick Corbishley at wolfstreet.com:

Crown Estates, which manages the Queen of England’s portfolio, recently wrote down the value of 17 shopping and leisure centers by 17%, cutting Her Majesty’s net worth by £552 million. As The Economist points out, this is “fairly small beer” set against the £13.4 billion valuation of the Queen’s property portfolio, which includes some of London’s toniest real estate.

But the Queen will not be left out of pocket, since her income — set at 25% of the profits generated by the Crown Estate — will be topped up with a taxpayer bailout. In fact, thanks to the Sovereign Grant Act of 2011, the overall amount given to the Queen each year in order to fund her official duties is never allowed to fall, regardless of what is happening in the broader economy.

“In the event of a reduction in the Crown Estate’s profits, the sovereign grant is set at the same level as the previous year,” a spokesperson told The Independent. “The revenue from the Crown Estate helps pay for our vital public services – over the last 10 years it has returned a total of £2.8 billion to the Exchequer.”

Any profits made by the Crown Estate are passed to the Treasury which, in turn, hands 25% of the profits back to the Queen through the sovereign grant. This year, things will be a little different. To cover the fall in value of the Crown’s Estate, the estate has struck an agreement with the Treasury that allows it to begin making “staggered” revenue payments to the government, thus keeping a larger share of the profits to itself.

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One of the greatest follies from the last crisis is back, by Simon Black

Gargantuan projects with slim or no hope of repaying their original investors seem to invariably crop up towards the end of debt-fueled expansions. From Simon Black at sovereignman.com:

Hudson Yards is a gigantic real estate project on New York City’s western edge that will be the most expensive development in US history when it’s completed in 2025.

At $25 billion, the project costs more than the size of the entire economy of Iceland… which is saying a lot given that Hudson Yards is only 28 acres… literally one millionth the size of Iceland.

According to the plan, in seven years (so they say) Hudson Yards will be a neighborhood of gleaming towers with high-end retail, fancy law firms and private equity shops, overpriced apartments, and ridiculous works of art like “the Vessel”.

The Vessel is basically a giant woven staircase made from copper; it stands 15 stories, weighs 600 tons and has 2,500 climbable steps inside.

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This Hits the Wheezing Commercial Real Estate Bubble at Worst Possible Time, by Wolf Richter

Are the Chinese withdrawing from the US commercial real estate market. If so, that’s not bullish for real estate prices. From Wolf Richter at wolfstreet.com:

The last big enthusiastic buyer, China, is leaving the party.

Commercial real estate, such as office and apartment towers, in trophy cities in the US and Europe has been among the favorite items on the long and eclectic shopping lists of Chinese companies. At the forefront are the vast, immensely indebted, opaquely structured conglomerates HNA, Dalian Wanda, Anbang Insurance, and Fosun International. In terms of commercial real estate, the party kicked off seriously in 2013. Over the two years in the US alone, according to Morgan Stanley, cited by Bloomberg, Chinese firms have acquired $17 billion worth of commercial properties.

In the second quarter in Manhattan, Chinese entities accounted for half of the commercial real estate purchases. This includes the $2.2 billion purchase in May of the 45-story office tower at 245 Park Avenue, the sixth largest transaction ever in Manhattan. At $1,282 per square foot, the price was also among the highest ever paid for this type of property.

Most of HNA’s funding for this deal — one of its 30 major acquisitions since the beginning of 2016 — was borrowed from China’s state-owned banks. But HNA also borrowed $508 million from JPMorgan Chase, Natixis, Deutsche Bank, Barclays, and Societe Generale. This has been the hallmark for all Chinese acquirers: a lot of borrowing from China and some funding from offshore sources.

Similarly, Chinese acquirers accounted for about one-quarter of commercial property transactions in central London in 2016, according to the Morgan Stanley report. In Australia, over the past few years, Chinese firms accounted for 12% to 25% of all office transactions by value.

But now these conglomerates and other Chinese firms engaging in outbound acquisitions have run into a veritable buzz saw of regulatory efforts by Chinese authorities designed to accomplish two things: slow down these capital outflows; and keep the Chinese banks from getting perforated by their exposure to the overleveraged conglomerates.

The authorities put the banks under intense pressure to deleverage. And the banks put the conglomerates under pressure to deleverage. A number of deals have already gotten scuttled.

To continue reading: This Hits the Wheezing Commercial Real Estate Bubble at Worst Possible Time

 

Next Asset Bubble Cracks: It’s so Big even the Fed is Fretting, by Wolf Richter

Commercial real estate has always been boom and bust. Is the next bust upon us? From Wolf Richter at wolfstreet.com:

Commercial Real Estate’s boom-and-bust cycle heads south.

Commercial real estate’s eight-year boom reached such breath-taking levels that even the Fed has been pointing it out as one of the reasons for tightening monetary policy. The Fed is worried because of the size of the sector, its leverage, and what it did to the banks during the Financial Crisis. And now commercial real estate prices are heading south once again.

Green Street’s Commercial Property Price Index, which tracks the value of property owned by real-estate investment trusts, fell 0.4% in May to the lowest level since May 2016:

This is not happening because there is some sort of crisis. And this is not a crash, as during the Financial Crisis, when the spigot was suddenly turned off and liquidity disappeared overnight. Instead it’s a slow process that is happening despite super-low long-term interest rates, enormous liquidity in the markets, and super-easy financial conditions powered by yield-chasing risk-blind investors.

One of the primary drivers of the decline are the values of retail malls that have been getting hit by store closings and bankruptcies of their tenants as brick-and-mortar retail is melting down. So the sub-index for malls fell 2.8% in May and 5% for the past three months, and is down year-over-year. Other weak areas are apartment buildings. But industrial space – such as warehousing, one of the beneficiaries of the shift to online retail – remains strong.

Boston Fed President Eric Rosengren, one of the earliest advocates of unwinding QE, started warning about the CRE bubble last year. A couple of months ago, he gave a presentation on what CRE could do to “financial stability,” with some stunning charts.

The “significant decline in collateral values” of both commercial and residential real estate was “the root cause of the financial crisis,” he said. Currently, financial institutions hold $3.8 trillion of CRE loans:

  • Banks: $2.02 trillion or 53% of total
  • Life insurers: $460 billion or 12% of total
  • Government Sponsored Enterprises (such as Fanny Mae) and Agency commercial mortgage-backed securities: $521 billion or 14% of total
  • Non-Agency commercial mortgage-backed securities: $544 billion or 14% of total.

To continue reading: Next Asset Bubble Cracks: It’s so Big even the Fed is Fretting

 

Commercial Real-Estate Moguls “Breathe Easier” after Health Bill Collapsed, by Wolf Richter

The fate of a lot of commercial property is tied to the medical sector of the economy. From Wolf Richter at wolfstreet.com:

Who would have thought: Property bubble needs Obamacare.

When the effort in Congress to pass a health-care bill – the American Health Care Act, designed to replace the much maligned Affordable Care Act – failed on Friday, the thing that wasn’t supposed to happen happened: The industry that had whined for years about this, that, and the other in the Obamacare law, breathed a huge sigh of relief.

On Monday, despite the general unease in the stock market, heath care stocks rallied. Well, they didn’t exactly rally, they edged up. But it made them the best-performing sector among the 11 S&P 500 sectors.

But no one apparently breathed a bigger sigh of relief than the over-indebted and teetering Commercial Real Estate sector. Investors, including the largest asset managers in the world, had experienced the rich benefits of a multi-year mega construction boom of hospitals, medical office buildings, and other health-care facilities to accommodate the ballooning industry that is taking over the US economy and provides 16% of its private-sector jobs.

Property prices had soared over the years as part of the overall commercial real estate bubble. It has gotten so huge that if it deflates, it risks taking down the banks, particularly smaller banks where CRE lending is heavily concentrated.

Even Federal Reserve governors admit its policies since the Financial Crisis have helped fuel this bubble, and it admits that it is a bubble, and references to it keep showing up in their statements and speeches as the fretting has begun. Among them, Boston Fed President Eric Rosengren, a Fed “dove,” is now worried that the commercial real-estate bubble in the US has once again become a risk to “Financial Stability.”

To continue reading: Commercial Real-Estate Moguls “Breathe Easier” after Health Bill Collapsed

 

Commercial and Residential Real-Estate Bubble once again a Risk to “Financial Stability,” and Fed’s Rosengren is Worried, by Wolf Richter

Another bubble that’s starting to leak. From Wolf Richter at wolfstreet.com:

The Fed caused it, but it won’t do much to contain it.

Last year, Boston Fed President Eric Rosengren — considered a “dove” on the Fed’s policy-setting committee — started warning about the commercial real-estate bubble in the US and what its demise could do to banks. But in his speech on Financial Stability on March 22 in Indonesia, he added what I’ve come to call “Housing Bubble 2” to his ever more emphatic concerns.

Like all central bankers, he can’t warn publicly about an approaching problem because it could trigger the very problem he’d be warning about. In this manner, no one at the Fed saw the last bust coming. So Rosengren started out his presentation, “Financial Stability: The Role of Real Estate Values” – by clarifying this: “First, I am not here today to predict problems, but rather to suggest we continue working to head them off.

The phrase, “continue working to head them off,” is ironic because he also pointed out what has caused these problems: “very low interest rates” that were “wholly necessary” and that he “strongly supported.”

But the risks are massive.

Rosengren finds that “the root cause of the financial crisis was a significant decline in collateral values of residential and commercial real estate” and “exposures across the banking system that are correlated and sizeable.”

Real estate becomes a trigger for a financial crisis because of its high leverage. For banks, these properties are collateral. When property values tank, the collateral is impaired. Defaults rise. Then broader problems spread into the economy. Property owners experience a reduction in income. Homeowners see their paper wealth evaporate and financial stress rises. At some point, banks begin to fail.

To continue reading: Commercial and Residential Real-Estate Bubble once again a Risk to “Financial Stability

The Next Domino to Fall: Commercial Real Estate, by Charles Hugh Smith

Retailers falling off a cliff will take a lot of commercial real estate, and commercial real estate collateralized securities, with it. Fro Charles Hugh Smith at oftwominds.com:

Unless the Federal Reserve intends to buy up every dead and dying mall in America, this is one crisis that the Fed can’t bail out with a few digital keystrokes.

Just as generals prepare to fight the last war, central banks prepare to battle the last financial crisis–which in the present context means a big-bank liquidity meltdown like the one that nearly toppled thr global financial system in 2008-09.

Planning to win the next war by assuming it will be a copy of the last confict is an excellent strategy for losing the next war. The same holds true for the next financial crisis: reckoning that it will be a repeat of 2008 is an excellent way to be caught completely off-guard.

Crises may rhyme, but they don’t repeat. The next Global Financial Meltdown won’t start in subprime mortgages–that sector has been wiped out, written down, or passed on to the poor tax-donkey taxpayers.

The next crisis also won’t arise on money-center banks, either. Central banks have figured out how to bail out the banks, and have rebuilt the bank balance sheets by stripping hundreds of billions of dollars in interest from savers.

(Sorry, widows and orphans–your interest income had to be transferred to the big banks. We’re sure you understand why the banks are more important than you are as you enjoy yet another meal of canned beans and saltine crackers.)

The central banks and state treasuries around the globe may be confident they can bail out the banks, but what if the next domino to fall isn’t a bank? What if it is a “safe, high yield asset” held by institutional owners such as pension funds, insurance companies and REITs (real estate investment trusts)?

What if the next crisis isn’t a spot of bother caused by excessive leverage, but a systemic collapse of collateral as an entire sector–retailers holding millions of square feet of bricks-and-mortar store space–falls off a cliff?

To continue reading: The Next Domino to Fall: Commercial Real Estate

Who’ll Get Hit by Fallout from the $11-Trillion Commercial Property Bubble in the US? by Wolf Richter

The commercial property bubble is popping. From Wolf Richter at wolfstreet.com:

It’s the banks they’re worried about.

Warnings about the loans, bonds, and commercial-mortgage-backed securities (CMBS) tied to the vast $11-trillion commercial property sector in the US have been hailing down for months. Moody’s Investor Services just warned about the rising delinquency rate of some $360 billion in CMBS it rates. Delinquencies of 60+ days jumped from 4.6% last year to 5.6% in September.

Fitch Ratings has been fretting about valuations in the sector, and CMBS, for months. “Valuation and lending trends are not sustainable in the medium term,” it said most recently in its November report. It pinpointed debt backed by apartment buildings as a particular trouble spot. But now it’s also fretting about construction loans, which “experienced the highest loss severity in the last crisis, and we expect a similar trend in the next downturn,” it said.

It’s worried about the banks, whose commercial real estate (CRE) lending has reached “record levels”:

All of the most concentrated banks – those with more than 300% of risk-based capital in CRE – have less than $50 billion in assets and most have assets below $10 billion. These smaller banks also have varying degrees of sophistication in their risk management practices.

Fitch laments that the “timing and severity of this softening is uncertain and depends on factors including interest rates and overall economic conditions.”

Alas, since the report was released on Election Day, interest rates have alread jumped. This comes at the worst possible moment, at the peak of the most gigantic CRE price bubble the US has ever seen.

The Green Street Commercial Property Price Index has soared 107% from the trough in May 2009 and now exceeds the peak of the totally crazy bubble in 2007 by 26%:

But it may have run out of steam. The index edged down in October, has been uncharacteristically flat for the past three months, and is up only 4.7% for the year – after annual increases that were often in the double digits.

Of the index components, on average across the major markets, lodging has plunged 12% year-over-year, and the prices of health care buildings are down 1% year-over-year. Apartment building prices are down 1% for the past three months, but are still up 5% year-over-year. Self-storage was flat last month, but is still up 14% year-over-year. It’s up 80% from the peak of the prior bubble in 2007! Industrial, mall, office, and strip retail properties were all flat last month but year-over-year still rose between 3% and 7%.

In some of the top rental markets, rents have come under severe pressure, including San Francisco, New York, and Boston. Building prices are trailing behind.

As buyers have suddenly lost their enthusiasm, commercial property sales volume dropped 8.6% in the first nine months this year to $345.4 billion, according to Real Capital Analytics, cited by the Wall Street Journal.

“I can paint a picture that it could be disastrous, with runaway inflation and high interest rates,” said Charlie Bendit, co-chief executive of Taconic Investment Partners, at a New York industry luncheon last week, according to the Journal.

Part of the problem in the current cycle are CMBS that were originated before the Financial Crisis in 2006 and 2007 and that are backed by ten-year loans that are now coming due. Fitch calls it “the wall of maturing loans.” $205 billion of these maturing CMBS are rated by Fitch. Now the loans need to be refinanced. And that may be tough.

To continue reading: Who’ll Get Hit by Fallout from the $11-Trillion Commercial Property Bubble in the US?