The February Oversight Report of the Congressional Oversight Panel chaired by Elizabeth Warren concentrated on the state of CRE (Commercial Real Estate). There are many interesting details in the report. I'll abstract a few here.
First is the following graph which reflects on loan underwriting standards during the credit bubble.
The amazing laxity in underwriting from 2004 through 2007 did drop in 2008, but only to a level above 2003 and much higher than years before that. In 2009 the graph implies that lenders were going back into lax bubble standards. Part of the 2009 number may result from an effort to renew or rollover debt coming due for principal payments that had been issued as interest only initially and were continued in that status.
In the report it is revealed that commercial property values have declined about 40% on average since 2007. How would you like to make an interest only loan on something that declined by 40% in less than three years? Commercial banks issued about 45% of he CRE loans (about $1.5 trillion). Asset backed securities are the next largest holder of these loans at 21%. The remaining third are spread out among insurance companies, savings institutions, GSEs (government sponsored enterprises), governments directly, agency and GSE backed mortgage pools and a small amount labeled "all other".
The report indicates that about 10% of the $1.5 trillion in CRE debt held by commercial banks is delinquent, defaulted or non-performing as of 3Q/2009. The report repeatedly says that things are going to get worse, so the $150 billion will be increasing. There are 8,108 banks that have CRE loan exposure. Of these, 2988 are stated to have concentrated exposure to CRE. These are exposures that put the banks' survival at risk. This is much larger than the 1,882 troubled banks that analyst Chris Whalen determined last summer. His estimate raised a lot of eyebrows back then. Now it seems quite conservative.
Two other interesting items from the report. First, the following graph shows vacancy rates by commercial property type:
From the above graph I estimate the following approximate increases in vacancies since 2006-07:
- Office space - 25%
- Multifamily - 35%
- Industrial - 45%
- Retail - 70%
This graph is to mid-year 2009 and all curves were rising at that time.
Finally, mean recovery percentages are given for defaults in 2009. The average for all defaults was 63%. The highest recoveries were 73% for retail properties and 72% for industrial. The lowest recoveries were 50% for land and 46% for development sites.
This is a long but very readable report. I still have many sections to read carefully, but I assure you I will get to it. I recommend you do the same.
Note: The week before the Warren report was issued, an article by David Ellis at CNNMoney.com had the following quote:
Industry observers have issued dire warnings for more than a year, suggesting that lenders are on a collision course with potentially billions of dollars worth of commercial real estate losses.
But for all the gloomy talk, the fallout has remained relatively well contained.
Banks have already recognized about $50 billion in losses, or about 60% of the estimated cumulative losses, according to real estate research firm Foresight Analytics.
And despite a steep drop in the price of apartments, office buildings and industrial properties nationwide over the past year, there have been recent indicators to suggest that the market may have finally hit bottom.
After 13 months of consecutive declines, overall commercial property values climbed 1%, according to the most recent monthly reading by Moody's/REAL Commercial Property Price Index.
Do you think the Warren Panel is wrong? It would be nice if it were so, but I think it is not likely.
Disclosure: No stocks mentioned.