2010 – Where’s The Deals? Where’s The Work?
February 24, 2010
We’re over two years into the Great Recession, and commercial real estate is essentially still paralyzed in nearly every respect. What’s going on?
Well, believe it or not, there is so much commercial real estate that’s underwater and lenders are still so desperately short of capital that there’s still isn’t the money or the manpower in the banking system (or the federal government for that matter) to work through the problems. Don’t forget that the major lenders just got done paying back TARP money. You can start to understand why no one is talking about it. You might be inclined to get scared again, and no one wants that.
Surviving lenders (and the FDIC) will spend most of 2010 continuing to delay loan workouts and foreclosures, and focus instead on recapitalizing and staffing up their workout and OREO departments. The real heavy lifting won’t start to begin until 2011.
Let’s look at the numbers. By most estimates, it is conservatively expected that well over $150 billion of commercial real estate financed with CMBS money will have to have to be dramatically restructured or foreclosed in the coming years. If you assume that each loan averages $15 million, that equates to 10,000 loans. There is over $750 billion in loans that will come to term in the next four years and have to be refinanced, restructured and sold or foreclosed. That equates to about 50,000 CMBS loans.
Now, consider the fact that CMBS financing only accounts for about 20% of commercial real estate financing, with the other 80% being loans held by conventional banks. So now were talking about as many as 100,000 commercial real estate loans that will hit the wall through 2013. The write offs and physical manpower necessary to deal with this wreckage is really staggering.
Added to this is the reality that between 750 and 1,500 banks are still effectively insolvent, and will have to be closed by the FDIC or other regulatory agencies in the coming years. If you assume that banks are closed at the rate of 25 per month – which is well short of the current rate of closure – it will take three to five years just to close them all. When you consider that it takes many months to work through the loans after the banks are closed, you can start to appreciate how very long it will take to sort through this mess.
So, get ready for a very long haul. Commercial real estate in 2010 will be uneven – filled with lots of turbulence and air pockets. Loan workouts and foreclosures will gain speed and altitude with each passing month, but it won’t feel like it for some time to come.
