Tuesday, 6 November 2007

Ominous signs for US Commercial Real Estate

As noted a while back Commercial Real Estate and Retail spending will be the last shoes to drop signaling a recession. Two interesting posts appeared today on that topic suggesting Commercial Real Estate maybe about to take a turn for the worse. The First from Mish at MGETA:

Commercial Real Estate Heads South

Simmering beneath the surface and unbeknownst to most is a pronounced deterioration in commercial real estate. The evidence is can be seen in widening spreads in the tranches of Commercial Mortgage Backed Credit Default Swap Benchmark CMBX Indices.

Commercial real estate problems are in addition to massive problems in the guarantee business as evidenced by the huge widening of spreads on the two largest bond guarantee companies, Ambac Financial Group (ABK) and MBIA Inc (MBI).

For more on the systemic risk in the bond guarantee business, please see a Downward Spiral of Deep Junk.

Rising spreads represent a greater chance of default. In commercial real estate, most spreads are now wider than they were in the peak of the mid-summer credit crunch. This indicates two things:

* Problems that previously affected only residential real estate have now spread in a big way to commercial real estate.
* In spite of the big stock market rally off the summer lows, underlying credit conditions are deteriorating rapidly.

Click on the link to see the charts of the CMBX Mish talks about. The other post comes from Calculated risk, the author has an interesting graph showing tightening lending standards and demand for CRE loans is turning down sharply and if history is any guide that means CRE investment is sure to follow.

Commercial Real Estate Update

This graph shows the YoY change in nonresidential structure investment (dark blue) vs. loan demand data (red) and CRE lending standards (green, inverted) from the Fed Loan survey.

The net percentage of respondents tightening lending standards for CRE has risen to 50%. (shown as negative 50% on graph).

The net percentage of respondents reporting stronger demand for CRE has fallen to negative 34.6%.

Loan demand (and changes in lending standards) lead CRE investment for an obvious reason - loans taken out today are the CRE investment in the future. This report from the Fed suggests a slowdown in CRE investment in the near future.