Once again another Optimistic View...this time from Moody’s

Implications: Moody’s is one of the main “bad actors” in the whole credit mess. They are one of the main rating agencies that gave triple A ratings to what are now considered junk status for the collateralized bonds. In my estimation they have ZERO credibility. Of course they don’t want to admit the commercial market may not be as bad as the residential fiasco.

Analysis:  "Fundamentally the markets are in pretty good shape," says James Duca, managing director of Moody's Investors Service.

And we should be believe this managing director of Moody’s because why?    

This is the same rating agency that was putting their highest ratings on CMBS, CDO’s and every other collateralized debt obligation tied to real estate without really knowing how to evaluate the underlying collateral. They finally admitted the securitized instruments were much too complicated and are now reassessing their approach.  

This is after they were a major party to the credit collapse we are currently experiencing. Please remember the very same rating agencies were collecting major fees to rate the debt instruments being sold in the Public Markets.    


If Moody’s and the other major rating agencies could not figure out how to underwrite the securitized debt obligations of the past few years, then how in the world can they come out and say what is quoted above.    


Moody’s et al have no prior experience in the world of real estate either residential or commercial. The rating agencies did not pay attention to the “Collateral” part of the securitized debt. Since this was the case, why would we now believe they have any idea of what the fundamentals are or what they are going to be moving forward?
It’s a called a total lack of credibility.    


The fact the WSJ is still quoting them also tells this writer the lack of knowledge and understanding the publication has by quoting Moody’s in the first place. 


If the commercial market behaves even a fraction the same way as the residential market albeit not as dramatically, Moody’s et al will have another bullet to try and dodge.  


The fundamentals the optimists keep alluding to are based on current looks at the commercial real estate statistics. As this writer has been repeating, commercial real estate statistics are a “lagging” indicator.   It seems that unless you’ve been in the commercial real estate business greater than 25 years, it has not sunk in that the commercial market takes not months but years to react fully to current economic events.  

For example is Moody's looking at the retail sector which according to retail real estate experts quoted today in the Associated Press..."Part of the problem, is that more retail space is coming to the market just as consumer demand is falling. Another 130 million square feet of retail space will become available this year,  on top of last year’s 143 million. That is well above the average 100 million square feet added per year earlier in the decade."

Many of the major office markets are beginning to see upward trends in vacancy. Therefore you do not require all that much new construction to throw the "fundamentals" out of whack.

What the optimists and especially the rating agencies, are completely blind to, as are most of us, are the following questions that need to be answered.

1.How many buildings were purchased in the last 2-3 years at low cap rates and highly leveraged debt?
2.How much vacancy was bought at the time?
3.How many of these properties were bought based upon “proforma” income projections which reflected overly optimistic rental increase assumptions?
4.How many tenants have leases expiring in the next 12-18 months, and how many square feet do these represent?
5.How many will be renewed?
6.What is the overall credit quality of these tenants?
7.How many of the leases due to expire will be renewed based on current market rates vs. pre-determined option rates.
8.What Industry groups who have leases expiring are recession sensitive and how many square feet do they represent?
9.What will be the effect  of the upcoming Presidential Election, especially if Democrats win, as it will most likely mean increased corporate taxes?
10.With Oil and Gas prices increasing to a level that will be felt by all corners of the economy, how will this affect business expansion?
11.How long will it take for the current credit crisis to resolve itself and how much worse will it become?
12.With a downturn in the economy, meaning less demand for goods, how will warehouse/distribution space fare?
13.With the economic downturn, how much worse will the retail sector become? Consumer spending is already on the decline.  


Unless these questions can be answered, and be answered in the affirmative, to say the fundamentals of the commercial market are good, is not even close to being accurate. It’s a blanket statement that holds no meaning.

But then again as we have learned, its not in Moody’s or the other rating agencies best interest to be accurate.  

And as we have further learned, Wall St. has been viewing commercial real estate as a commodity which is also a wrong approach. Every building is different with its own set of circumstances.