Market Commentary

As widely noted there is about $1.4 trillion in commercial real estate debt
November 12, 2009

As widely noted there is about $1.4 trillion in commercial real estate debt that will come due in the next four years.  Values are down around 25%.  The question that cannot be answered what is the potential default rate, a major reason I believe why banks are hesitant to lend.  Excess bank reserves are now over an unfathomable $1 trillion.

Based upon firsthand experience I believe banks will work their borrowers extending maturities and the like as long as the project is cash flowing waiting (hoping) for asset values to recover.

Some have opined the impending commercial real estate crisis will create an insolvent banking system.   Market historians know the banking system was essentially insolvent in the early 1980s as Latin and South American imploded ushering in that banking crisis.  In that era the regulatory officials permitted  money center banks to carry the debt on their balance sheet only writing it down as cashflows diminish. 

In some aspects today is similar to yesterday.  Values are down but banks are adopting a similar workout strategy.

To write the obvious, today’s drop in commercial real estate value is the direct result of the economy.  Commercial building is virtually nonexistent.  Today’s extrapolation of vacancy rates and values is based upon the events of the last 24 months or the worst economic conditions since the 1930s.

If the economy is recovering does not the rate of decline in values also subside?  Does this logic also apply to vacancy rates? 

As noted several times rarely do crisis evolve if problems are discussed and solutions are discovered before the potential drop dead date.  While I do believe commercial real estate is an “issue” I don’t think it will not become the event many fear because of the above rationale.

Moreover once banks become more confident about the recovery, banks will then begin lending hence adding further support to commercial real estate.  Incidentally I think we are about 45-60 days away from this inflection point.  All other aspects of the credit market have healed except for bank lending.

Yesterday markets were quiet because of Veterans Day.  What will occur today?

Last night the foreign markets were mixed.  London was up 0.01%, Paris down 0.13% and Frankfurt up 0.01%.  Japan was down 0.68% and Hang Sang down 1.10%.

The Dow should open nominally lower on profit taking.  The 10-year is up 5/32 to yield 3.46%.