Motivated Sellers

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Realpoint's latest report on commercial real estate is a doozy (PDF). You couldn't get a more sobering readout with a shower and a quart of hot coffee.

In January 2010, the delinquent unpaid balance for CMBS [Commercial Mortgage-Backed Securities] increased by another $4.3 billion, up to $45.94 billion from $41.64 billion a month prior. The overall delinquent unpaid balance is up 326% from one-year ago (when only $10.79 billion of delinquent unpaid balance was reported for January 2009), and is now over 20 times the low point of $2.21 billion in March 2007.

Overall, the total unpaid balance… for the January 2010 remittance was $797.3 billion… Both the delinquent unpaid balance and delinquency percentage over the trailing twelve months are… clearly trending upward.

The total balance of loans in Foreclosure and REO increased for the 27th straight month to $9.64 billion in January 2010 from $9.34 billion in December 2009 and $8.78 billion in November, despite ongoing liquidation activity. The chart also shows the rapid growth of loans reflecting 90-day delinquency in the past 12 months, transitioning swiftly from 30-day defaults into more distressed levels on a monthly basis in 2009, thus supporting our use of such as an early indicator of workouts to come for 2010.

Put simply: brace for more pain in the commercial real estate space.

Well, residential real estate must be improving, right? Not exactly. The following Blytic graphs depict the real estate price index (RPX) in various metro areas since the year 2000.

Here's the graph of home prices in Phoenix, Arizona. Gee, that home-buyer tax credit didn't really work, but at least he was historic, right, Melvin?

Say, Las Vegas is hopping.

Gun-free Chicago — my kind of town. Except for the hundreds of murders each year, thanks to the insane policies of Mayor Daley and the rest of the Democrat machine.

Miami - whyamee?

Mayor Kilpatrick (D-umb) and Governor Granholm (D-umber) certainly worked wonders in Detroit.

At least the masterful leadership in its city and surrounding counties — as well as ultra-careful land use policies — saved Atlanta from… oops.

Thankfully, the Obama administration has created or saved over ninety million green collar jobs. Secretary of the Treasury Tim Geithner's behavior has been beyond reproach. And the American Recovery and Reinvestment Act has brought much-needed tax relief for small businesses and 95 percent of all working families.

Thank heavens for President Obama and his crack staff of economic advisers who have brought so much real world experience to their current roles. If it weren't for them, I'm not sure what kind of shape this country would be in.

Hat tip: Mish.

Here are a couple of stories similar to thousands playing out across the country, and tens of thousands more to come. The second article gets to the heart of the upcoming commercial real estate bust.

The Minneapolis Star Tribune is reporting Brookdale Mall sold at auction for big markdown.

A sheriff's foreclosure auction produced just one bid — from the mall's mortgage-holders, who bid $12.5 million.

Photo By Glen Stubbe, Star Tribune

Brookdale Center went on the auction block at a sheriff's foreclosure sale Friday, netting just one bid of $12.5 million from the shopping mall's lenders.

The bid from Brookdale Mall HH LLC was well below the $51.8 million owed on a $54.2 million mortgage by the property's owners, Brooks Mall Properties of Coral Gables, Fla.

Sears is its sole remaining anchor. In the last couple of years Macy's, Barnes & Noble and Mervyn's have all closed their stores. The mall also has lost other key tenants, such as Steve & Barry's. Almost 60 percent of its space is vacant, according to recent figures from NorthMarq.

Commercial Real Estate Crisis Coming

The following story headline masquerades as a local (D.C.) problem but the real story buried in the article is a few select quotes from Elizabeth Warren.

Please consider In D.C., more evidence that commercial real estate headed for foreclosure crisis.

A mortgage crisis like the one that has devastated homeowners is enveloping the nation's office and retail buildings, and few places are likely to be hit as hard as Washington.

The foreclosure wave is likely to swamp many smaller community banks across the country, and many well-known properties, including Washington's Mayflower Hotel and the Boulevard at the Capital Centre in Largo, are at risk, industry analysts say.

“There's been an enormous bubble in commercial real estate, and it has to come down,” said Elizabeth Warren, chairman of the Congressional Oversight Panel, the watchdog created by Congress to monitor the financial bailout. “There will be significant bankruptcies among developers and significant failures among community banks.”

Nearly 3,000 community banks — 40 percent of the banking system — have a high proportion of commercial real estate loans relative to their capital, said Warren, whose committee issued a report on commercial real estate last week. “Every dollar they lose in commercial real estate is a dollar they can't use for small businesses,” she said. Individuals — who saw their home values drop in the residential mortgage crisis — would not feel that kind of loss, but, Warren said, a large-scale failure would “throw sand into the gears of economic recovery.”

In Washington, the office vacancy rate stopped ballooning in the fourth quarter of last year for the first time since the first quarter of 2006, according to CoStar, although largely for an unfortunate reason: The space was being filled mainly by office workers hired to handle the plethora of bankruptcy filings and “workouts” of borrowers who need to renegotiate bad debt.

Do the math'

Nationwide, at least $1.4 trillion in commercial real estate debt is expected to roll over during the next three years. Warren said that half of commercial real estate mortgages will be underwater by the beginning of 2011. A fifth of residential mortgages are underwater now, she said.

Unlike residential mortgages, which often can be paid over 30 years, commercial real estate mortgages typically must be paid off or refinanced within five years. Commercial properties mortgaged in 2005, 2006 and 2007, at the height of the boom, are reaching their maturity date. “Do the math on this,” Warren said. “This is a significant problem.”

Do The Math Indeed

There is a strong potential to see a thousand commercial real estate bank failures in the next couple of years unless Congress acts to bail them out. Bernanke is unlikely to lift a finger as his concern is for the big boys, who he will support at any and all costs.

Of course no banks should be bailed out, and two wrongs do not make a right. Thus, the correct decision is to let failed banks fail. The last thing we need is further bank zombification.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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