Your daily dose of frightening economic news, this time focused on commercial real estate.
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by John Cole| 20 Comments
This post is in: C.R.E.A.M., Domestic Politics
Your daily dose of frightening economic news, this time focused on commercial real estate.
Comments are closed.
AxelFoley
Ever wonder who’s more conservative between Obama and Reagan? Well, noted concern troll Cenk Uygur wants to know:
http://www.dailykos.com/story/2010/7/8/882569/-Who-is-More-Conservative:-Ronald-Reagan-or-Barack-Obama
EconWatcher
Remember that feeling in late 2008 and early 2009, that the world was collapsing? Well, that was real, and what we’ve been living since then has been the mirage.
I agree with most of what the Obama team has done–because there were no better choices–but really, all we did was patch up our crumbling economy with a load of duct tape.
There was a certain logic to this: Perception can become reality. Our only chance was to make everyone believe enough to sustain some floor of economic activity while painful restructuring took its course and (we hoped and prayed) a real economy emerged.
It was worth a shot. But I think I can see the jury shuffling into the room, and the foreman looks grim.
Napoleon
John, welcome to my world. A huge chunk of my time over the last couple of years has been working on papering kicking the can down the road for banks for 90 days to a couple of years at a time. Sitting in front of me is one that is north of $30,000,000.
Linda Featheringill
Commercial real estate has been frightening intelligent people for a couple of years. I guess that everybody involved has been trying to temporarily keep things afloat until the economy comes back.
If it comes back.
I don’t blame them for trying, though.
BR
Calculated Risk covered this better yesterday:
http://www.calculatedriskblog.com/2010/07/cre-extend-and-pretend.html
(btw, in general Business Insider is a site that pushes a pro-GOP view and generally just steals content from Calculated Risk, Zero Hedge, The Automatic Earth, and a few other such sites.)
PeakVT
Yves did a post on extend and pretend yesterday, too. Also.
Svensker
In addition to the big commercial real estate holdings, I’ve noticed something in our northern NJ NYC suburb. In our town of 25,000 there are nearly 50 empty storefronts. Yet rents for these storefronts are astonishingly high, like 12K a month for a moderately sized shop. When I talked to one shopkeeper he said that REITs mostly own the buildings and if they lose money on the rents, the partners in the REIT get huge tax deductions. So they have no interest in making the rents more realistic.
Jack Bauer
OT from the commercial real estate doom and gloom, is Stiglitz doing his best Krugman impression… or do I have that backwards? He slays a couple of economic unicorns:
Try as he might, I fear that neo-liberalism will win out in Europe too, and we will be making things much harder for ourselves.
demimondian
As is often the cast, the story’s quite a bit more complicated than the hyper-ventilators paint it.
Yes, the banks which hold these mortgages are pretending. Yes, many of them will eventually fail — approximately 48%, according to the article.
What the article doesn’t point out is the consequence of that fact: 52% won’t fail, and will remain performant. The banks need to balance those two facts against one another — taken at random, it’s even odds that any given loan will fail in spite of the extensions granted. If the banks are responsible, and take precautions against the half of their loans which will eventually require foreclosure, then they’ll be fine, whether or not they “extend and pretend” right now.
So which is better? Take the huge hit for a bunch of properties which aren’t actually going to fail, because a minority of them will, or wait until the ones which can’t recover become clearly visible, and take the hit on those? From either a local or a global view, that isn’t a clear decision.
That’s why the WSJ article is more nuanced in its discussion of the role of regulators in this. The regulators are trying to force the banks to honestly recognize those properties which are truly dead parrots, while allowing them to coax along those which are merely pining for the fjords of Norway until they wake up.
rootless_e
the drop in commercial real-estate is good. Real-estate ponzi imposed a high cost of doing business on the renters who do real economic activity.
an economy where debt flooded hermes stores pay giant rents to debt flooded mall developers really does not have much to recommend it.
rootless_e
@Jack Bauer: it’s not even true for individual companies. The entire concept of venture capital is to essentially borrow money and invest it to create future earnings.
cleek
speaking of looming disasters, let’s Draft Palin for RNC chair!!.
based on the (near total) lack of funny names in the signature list, i think they’re scrubbing. but, it can still be fun…
lawguy
I’ve been hearing this for some time. It’s not new news.
joe from Lowell
There’s a big difference between the CRE sector and the mortgage meltdown. The problem with commercial real estate loans isn’t that there was some structural problem with the loans themselves – exploding ARMS and cheater loans and wholly-unpayable loans made to people who expected to flip them. The CRE market didn’t actually get into a bubble. It’s in trouble for the same reason hairdressers and auto-body shops are in trouble: the economy sucks.
Which means that, unlike the residential mortgages, the CRE loans actually will be ok when the economy recovers.
WereBear
As anyone who has played Sim City knows, commercial is your fussiest and most hysteria prone segment of the economy.
And now we have two interlocking elements, missing: the small business owner who used to scrap up the cash for a storefront, having no choice, now puts that money into a website instead.
And (didn’t know about the REIT & taxes, but it makes sense) we used to have landlords who wanted rent, and kept it low to have tenants at all. They no longer have these tenants, and now want craaaaaaaaaaaaaaaaazeeeeeeeeeeeeeeee rents.
CynDee
What I am paying attention to this morning is the state of Tunch’s health.
At least we know that the two people in charge of it can be trusted with the well-being of an American (feline) citizen, won’t lie to him, and won’t defraud him, leave him to suffer needlessly, or wonder where his next can of tuna is coming from.
sparky
@joe from Lowell: i would LOVE to have whatever it is you are smoking, dude.
CRE is not as overbuilt as residential but to claim it’s going to be fine is a bad joke akin to claiming that if taxes were reduced to zero the economy would be roaring.
demimondian
@sparky: Actually…CRE *is* as overpriced as residential; in fact, it’s arguably *more* overpriced. There’s no question that a correction is desperately needed in that sector, and (as all such corrections do) that it will come, will we, nil we.
The only question is how much we can moderate its negative impacts by spreading them out over time.
HyperIon
@BR: Calculated Risk covered this better yesterday
i agree.
and thanks for the info on BusinessInsider’s slant.
CR and BaselineScenario are my 2 goto sites on the economic meltdown. both saw it coming and continue to track events.
ktward
An observation:
Evidently, banks have been–and still are–willing to jump through extraordinary and, apparently, controversial hoops to ‘assist’ their commercial mortgage clients.
But not their residential loan clients. Indeed, with residential mortgages, the banks have hit noteworthy lows on the ‘assist’ scale.
I realize there are market complexities intrinsic to each, but c’mon.