Further confirmation about the extent of the current crisis and when it might end

Implications: As the article refers, the current credit crisis will be with us for quite a while. The ripple effects are great and deep. As this article points out there are new investment funds that are being created for the sole purpose of picking on the carcasses of distressed real estate debt and the properties themselves.   Today April 18, 2008 AT&T and Citigroup announced large layoffs, jobless claims shot up again in March. There have been several announced retailers filing for Chapter 11 Bankruptcy protection, which many believe will be Chapter 7 and out.

Analysis:  The problem within the credit markets will continue for the foreseeable future as the article demonstrates. Not only do you have lenders not lending or issuing new credit facilities, you have a virtual standstill in all credit products at all levels. Once the economy begins its decent, it will be a while before commercial real estate will truly feel the full effects of the current situation. The financial sector alone has shed hundreds of thousands of jobs, auto plants will be closing, and worker pay hours have been substantial reduced, which is one step short of being laid off.


Consumer confidence has eroded to close to twenty lows. Auto sales are in the tank, gas prices are approaching $4 pg, and inflation is seeping into all products and services due to the escalating cost of oil which is in record territory.   Will the news get any better anytime soon...this writer does not think so? This is just the beginning of a painful downward cycle which will ultimately hurt the fundamentals of commercial real estate even if it is not evident statistically yet.The cascading effect is just coming into focus.  

The thought about 4 months ago was the great savior for commercial real estate finance would be the Life Insurance Companies and Pension Funds. The unintended consequences as the article points out are those traditional mortgage sources are going to remain as conservative as they have always been and may even rein themselves in somewhat more. Their asset allocations are being driven by the decline in the equity markets which is throwing off their investment ratios. In addition many Life Companies and Pension funds have ownership/investment interest in many of the CMBS or securitized bonds. This is also throwing them a huge curve ball.

The Major Banks are in a holding pattern as they try and get themselves out from under the weight of their own mortgage problems. The Federal Reserve’s interest rate play is not translating into more lending as interest rates for borrowers are not getting any lower. The underwriting standards have gotten more restrictive which results in less qualified borrowers. The Federal Reserve is trying their best to prop up the banking system with the interest rate play and that is their main objective.  

On top of all this, the Dollar is continuing its nosedive which in turn keeps the price of oil going up and lastly unemployment is going up.  

Yet despite all the bad news, miraculously commercial real estate fundamentals are remaining steady. WHY you ask? This is because it takes many months or even years for the full effects of an economic slide to be felt in commercial real estate. However keep your eye on the commercial “sublet” market along with the unemployment figures; that will be the tale of the tape. Sublet space puts downward pressure on rents. As for the those that claim there hasn’t been over building, well here in the DC market that is not the case as this writer has pointed out before. On the macro level perhaps there was more construction restraint for offices, but that does not matter when companies contract, it will still leave vacancy of one variety or another. 


What's old is new again...meaning lending has gotten back to basics and this hangover will take a considerable amount of time to get over. 


Those buying the distressed debt will be interesting to watch and see how they fare. As there are so many who have no idea of what is collateralizing the bonds they own,  how these folks will figure it out is another question. Of course these are the very same folks that were structuring and pushing the CMBS mortgages   There is also the problem of dealing with the borrowers within a CMBS structure, as it usually requires the appointment of a ‘Special Servicer” for the bad debt. These folks are do not act or behave like traditional lenders.  

It will also be interesting to watch and see how the suggested FASB changes for Collateralized debt obligations plays out. If the FASB passes what they are currently proposing look out below. It will certainly put another dagger into its heart.

So once again, how will the fundamentals remain steady?