But office properties should fare relatively well over the near term, say JPMorgan analysts
The US commercial real estate market could decline by as much as 20 per cent over the next five to eight years as tighter credit squeezes business property but with less ferocity than it choked the housing market.
‘We believe commercial real estate loan performance peaked in 2007 and will deteriorate on an accelerating trajectory through 2009,’ JPMorgan analysts said on a conference call on Tuesday.
They said they expect values to fall by 20 per cent from their peak last year, and losses to total about US$120 billion, or 4 per cent of the US$3.2 trillion outstanding commercial real estate loans.
Commercial Mortgage Backed Securities (CMBS) would account for about US$30 billion of the losses and collateralised debt obligations (CDOs) would account for about US$40 billion of the losses, they said.
CDOs are bonds based on pools of the riskiest CMBS bonds, leases, mezzanine loans and other real- estate related instruments.
CMBS, including CDOs, accounted for 23.6 per cent of lending at the end of the third quarter of 2007, JPMorgan said.
Problems in the CMBS market will become apparent between 2010 and 2012, as many five-year mortgages mature, the JPMorgan analysts said.
This would lead the commercial property market into a more gradual decline than the housing market, which has been slammed by losses related to sub-prime mortgages. Those losses are expected to reach US$200 billion, or 15 per cent of the US$1.25 trillion of outstanding loans, the JPMorgan analysts wrote in a report discussed on the call.
Many commercial properties have been financed with low-interest, five-year mortgages that will have to be refinanced or the properties will have to be sold.
Lenders who do not sell their loans but rather keep them on their balance sheets, such as insurance companies and commercial banks, are expected to loose US$50 billion over the five-to-eight year period, giving them enough time to adjust reserves, the JPMorgan analysts said.
‘The relatively conservative underwriting of banks and insurance companies is likely to insulate them from many of the problems that will plague loans securitised into fixed-rate CMBS,’ the JPMorgan report said.
Moody’s Investors Service recently said it expected commercial property values to decline 15-20 per cent over the next few years and the delinquency rate to increase into the 1-2 per cent range.
But Michael Pralle, former head of GE Real Estate and now president of JER Partners, a real estate private equity firm, said real estate values already have fallen by 10 per cent or 15 per cent. ‘It’s literally the arithmetic of the lending.’
He said many buyers have lowered offers as they factor in the higher costs of borrowing and lower amounts of cash available to borrow.
Office properties, the largest sector of the commercial real estate market ‘. . . should fare relatively well over the near term due to the longer-term nature of their underlying tenant leases’, the JPMorgan analysts wrote. But, they added, retail and hotel properties, which are very sensitive to changes in the overall economy, are expected to underperform.
Benjamin Lambert, chairman of commercial real estate brokerage Eastdil Secured, said values at the very top of the office market would slip slightly, but the overall market may see values decline 10 per cent or 15 per cent. Eastdil Secured is a subsidiary of Wells Fargo & Co.
JPMorgan analysts said they expected that the relatively restrained construction of offices, apartment buildings, warehouses, shopping centres and hotels that occurred between 2003 and 2007 would mitigate losses.
This compares to the residential market, which has suffered from a glut of houses for sale.
JPMorgan also said declines would not be limited to the United States, adding that UK commercial property prices are like to fall 23 per cent and commercial property prices in Europe and Australia are apt to decline by 5 per cent to 10 per cent. — Reuters
Source : Business Times – 6 Mar 2008
US housing woes: It’s the affordability, stupid!
Posted by luxuryasiahome on March 6, 2008
GLOOM. Doom. Calamity. Home prices are tumbling. We’re bombarded by sombre reports. But wait. This is actually good news, because lower home prices are the only real solution to the housing collapse. The sooner prices fall, the better. The longer the adjustment takes, the longer the housing slump (weak sales, low construction, high numbers of unsold homes) will last. It’s elementary economics. Say, houses are apples. We have 1,000 apples, priced at US$1 each. They don’t sell. We can either keep the price at US$1 and watch the apples rot. Or we can cut the price until people buy. Housing is no different.
Even many economists – who should know better – describe the present situation as an oversupply of unsold homes. True, there is about 10 months’ supply of existing homes as opposed to four months a few years ago. But the real problem is insufficient demand. There aren’t more homes than there are Americans who want homes; that would be a true surplus. There’s so much supply because many prospective customers can’t buy at today’s prices. By definition, the ‘housing bubble’ meant that home prices got too high. Easy credit, lax lending standards and panic buying raised them to foolish levels. Weak borrowers got loans. People with good credit borrowed too much. Speculators joined the circus.
Look at some numbers from the (US) National Association of Realtors. From 2000 to 2006, median family income rose almost 14 per cent to US$57,612. Over the same period, the median-priced existing home increased about 50 per cent to US$221,900. By other indicators, the increase was even greater. But home prices could not rise faster than incomes forever. Inevitably, the bust arrived. Credit standards have now been tightened, and the (false) hope of perpetually rising home prices – along with the possibility of always selling at a profit – has evaporated. For many potential buyers, prices have to drop for housing to become affordable.
How much? No one really knows. There is no national housing market. Prices and family incomes vary by state, city and neighbourhood. Prices rose faster in some areas (Los Angeles, Miami, Phoenix) than in others (Dallas, Detroit, Minneapolis). Some economists now expect an average national decline of about 20 per cent. The Federal Reserve estimates that owner-occupied real estate is worth almost US$21 trillion. A 20 per cent reduction implies losses of about US$4 trillion.
The largest part would be paper losses for homeowners: values that rose spectacularly will now fall less spectacularly – back to roughly 2004 levels; that’s still 30 per cent or so higher than in 2000. But hundreds of billions of dollars of other losses are already being suffered by builders (from the lower value of land and home inventories), mortgage lenders (from defaulting loans), speculators and homeowners (from lost homes). Mark Zandi of Moody’s Economy.com estimates that mortgage defaults this year will exceed 2 million, up from 893,000 in 2006.
To be sure, all this weakens the economy. No one relishes evicting hundreds of thousands of families from their homes. Eroding real estate values make many consumers less willing to borrow and spend. Some economists fear a vicious downward spiral of home prices. More foreclosures depress prices, increasing foreclosures as people abandon houses where the mortgage exceeds the value. Losses to banks and other lenders rise, and they curb lending further. Particularly vulnerable would be Fannie Mae and Freddie Mac, the two government-sponsored housing lenders.
Up to a point, there’s a case for providing relief to some mortgage borrowers. In many cases, everyone would gain if lenders and borrowers renegotiated loan terms to reduce monthly payments. Losses to both would be less than if their homes went into foreclosure and were sold. The Treasury has organised voluntary efforts. Some measures being considered by Congress (for example, overhauling the Federal Housing Administration) might help. But other proposals – particularly empowering bankruptcy judges to reduce mortgages unilaterally – would perversely hurt the housing market by raising the cost of mortgage credit. Lenders would increase interest rates or downpayments to compensate for the risk that a court might modify or nullify their loans.
The understandable impulse to minimise foreclosures should not serve as a pretext to prop up the housing market by rescuing too many strapped homeowners. Though cruel, foreclosures and falling home values have the virtue of bringing prices to a level where housing can escape its present stagnation. Helping today’s homeowners makes little sense if it penalises tomorrow’s homeowners. An unstoppable free fall of prices seems unlikely.
Slumping home construction and sales have left much pent-up demand. What will release that demand are affordable prices. — The Washington Post Writers Group
By ROBERT SAMUELSON
Source : Business Times – 6 Mar 2008
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