Newsweek: commercial estate collapse is different, more difficult

bad commercial real estate loans

“It’s one of the largest losses we have forecasted for an individual loan,” says Steve Kuritz.

Dr. David Bronner, CEO of the Alabama Retirement Systems, the 43rd largest investment fund in America, spoke at Rotary Club here yesterday. He is one of the most respected fund controllers in the United States today by his peers.

1) Next month (July) California hits the wall financially, that will send a ripple effect across the US economy, AND over the next two years one state after the other will fall to it’s knees financially as the federal government stimulus package ends by 2011. It has helped various states at different levels comparative to their economic condition. He says the stimulus package is what’s been keeping the states alive for now…except for California which was in such terrible shape the stimulus package wasn’t enough to really help them. “They go first” he said. Alabama would hit the wall in February of 2011, late in the game as Alabama is in better shape than other states. Bronner says Alabama might dodge the bullet if the economy revives enough by then. But, he doesn’t really think things will improve enough by then to avoid a crisis.”It will be the largest economic crisis in the history of the State of Alabama.” Bronner says Alabama will experience such significant shortfalls by 2011 that taxes will have to be raised substantially to avoid collapse…probably on property. And that practically all states will face a similar fate.

2) Within 120 to 150 days from now the commercial real estate market nationally begins to collapse as stores, malls, and shopping strips, and industrial plant have enough closures (store and plant) and loss of rental revenue to make them unable to pay their mortgages. They will start going into foreclosure unable to pay their mortgages in a significant way at that time creating a second wave of economic disaster starting three to four months from now.

3) Unless oil stays above $70 a barrel Russian and Mexican economics will begin to unravel as countries (“socio-economic collapse) economies require that much from oil to have an adequate revenue stream to feed their people and economies. AND, the only other big revenue stream for Mexico is illegal drugs sold in the US…so their economy will intensify their focus on selling drugs in America as a result in order to survive if oil doesn’t stay above $70…he said $90 would be better for them.

4) The US economy (according to Bronner) is today like a patient in the emergency room in the process of having a heart attack. He said people tend to think of it as being in the hospital for cancer or chronic disease. Without the huge Bush stimulus, and then the huge Obama stimulus, the economy would have already flat lined…(i.e. we’d be experiencing a Great Depression style economic collapse heading toward 25% unemployment or so as the tumble would have continued and intensified at an increasing rate, with the stock market hitting around 2,000) Bronner said the depth of the crisis was greater than ANYONE realized and agrees today, after learning the extent of the crisis, that the federal government simply had to start “shoveling” money at it to prevent a true and complete collapse of our economy. He said he, at first, was mad at this shoveling of money until he learned the truth about the amount of money necessary to prevent a total collapse which he believes would have happened.

5) Inflation will not arrive for 3 to 5 years as the economy is in a deflationary stage due to the economic plummet…and will not experience inflation until people start “buying things” again, and that’s going to take while! He also believes 3 to 5 years is probably the term until true economic recovery establishes in the US and world economy.

6) China must start selling their products to people in their own country and paying their workers enough to buy them. This would increase their products prices, reducing their exports (and “besides they will lose interest in having more US dollars anyway”) and enabling other countries (US) to compete with them.

7) The greatest threat to the US economy is one of around 9 world events that could heap misery on top of misfortune at exactly the wrong time. A nuclear incident with N Korea, a plague, Israel attacking Iran (oil shock), or such could still throw the US economy into a Great Depression style situation. He said the greatest risk of this is anytime from now until the world economy gets somewhat back on it’s feet…in 3 to 5 years.

You can read the rest of this original article at Bilanciato Vita

Why This Real Estate Bust Is Different
By Mara Der Hovanesian and Dean Foust
Unrealistic assumptions, layers of investors, sky-high prices, and possible fraud will make it hard to clean up the mess in commercial real estate

When Goldman Sachs (GS) sold complex bonds backed by the Arizona Grand Resort and other commercial properties in 2006, it suggested the returns would be strong. The 164-acre luxury Arizona Grand, set against the Sonoran Desert in Phoenix, boasted an award-winning golf course, deluxe spa, and several swank restaurants. The on-site water park was named one of the best in the country by the Travel Channel. With the resort’s new owners planning to refurbish hotel rooms and common areas, Goldman told investors that the renovations would help boost cash flow.

As was so often the case during the real estate boom, the lofty projections didn’t pan out. When the economy softened and business travel slumped, Arizona Grand’s bookings slipped to 67%, from 80%. The resort defaulted on the $190 million underlying loan in 2009—a hit that alone could largely wipe out investors who bought the riskier pieces of the Goldman mortgage-backed securities deal.

“It’s one of the largest losses we have forecasted for an individual loan,” says Steve Kuritz, a senior vice-president at Realpoint, an independent credit-rating agency. The property, once valued at $246 million, is now worth just $93 million. A spokesman for Goldman says the pricing on the bonds was in line with market levels at the time and not above what investors could get on similar securities. Grossman Co. Properties, which owns Arizona Grand, didn’t return calls for comment.

It would be easy to write off this blowup as just another casualty in the regular boom-and-bust cycle of the $6.4 trillion commercial real estate market. But the Goldman deal, with its unrealistic assumptions, multiple layers of investors, and stratospheric prices, helps illustrate why this downturn is more complicated than previous ones—and will turn out to be far costlier. Already, prices have plunged 41% from the peak in 2007, according to Moody’s/REAL Commercial Property Price Index—worse than the 30.5% fall in the housing market from its 2006 apex. “We’ve never seen this extreme a correction as far back as the data go, which is the late 1960s,” says Neal Elkin, president of Real Estate Analytics, the research firm that created the index. Adds billionaire investor Wilbur Ross: “Commercial real estate has gone from being highly liquid at sky-high prices to being extremely illiquid at distressed prices.”

To appreciate why this bust is like no other, first consider the typical commercial real estate downturns that used to crop up every 5 or 10 years. The pattern was predictable: When prices for apartment complexes, office buildings, shopping malls, and other properties began to rise, developers sped up their projects to cash in on the bull market. Eventually, some of those developers, unable to fill all the new space, began to default on their loans, and lenders were stuck with the buildings they’d financed. The slump lasted no longer than the time it took for the property glut to be worked down.

TURNING A BLIND EYE

But overbuilding isn’t the culprit in this bust. An oversupply of money is what pushed commercial real estate over the edge.

It turns out the same excesses that drove the housing market’s crazy rise and fall were present in commercial real estate, too—but they have largely gone unnoticed until now. Bankers, in their haste to make more and bigger loans, blindly accepted borrowers’ wildest growth assumptions and readily overlooked other shortcomings on loan applications. They did so in part because they could easily sell their dubious loans to investors in the form of commercial mortgage-backed securities. As the market overheated, it became a breeding ground for fraud: A flurry of new court cases reveals the disturbing extent to which commercial mortgage borrowers may have doctored loan documents.

You can read the rest of this article from Business Week

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