Commercial Real Estate

Here are some interesting numbers on commercial real estate in America. Speaking of numbers, most quants and economists want to explain the world with numbers. This results in a "what's wrong with the world that it doesn't match the numbers?" disconnect. When I see numbers, I try to take the opposite approach. How does what's going on in the real world get reflected in the numbers?

Anyway, enough of the philosophical detour. Commercial real estate loans outstanding total $3.4 Trillion. Bloomberg is reporting that office vacancies are at 16.5%, a five-year high. Naked capitalism has a link to the WSJ with some great numbers and n.c.'s commentary on what this means for the banks. Leon Black, from Apollo Management estimates that CRE losses may top $2 Trillion. Since banks own more than half of CRE loans, their losses might reach half of that number. Unlike MBS, most commercial real estate loans stay on bank balance sheets. According to the WSJ, 800 banks have more than half their assets in CRE loans. Ouch! Collectively, banks have only $0.38 for every $1 in bad loans. Prices have already fallen 50% on most properties, so banks are way behind, especially if CRE gets worse.

No wonder the FDIC is bankrupt.

And despite their public statements to the contrary, the Fed is criticizing banks for being slow to take losses, according to Yahoo! As I dig into the details here, I find that I have to copy the article in its entirety and comment on it. There's so much here for such a short story.

WASHINGTON (Reuters) - The Federal Reserve told bank examiners last month that banks were slow to take losses on their commercial real estate loans that have suffered as property values sink.

The Wall Street Journal initially reported the Fed's concern and Fed
sources on Wednesday confirmed a presentation was made on the topic to
regulators but described it as a training exercise for examiners about potential real estate issues.

The Journal report said the presentation was made on September 29 by Fed analyst K.C. Conway, a senior real estate analyst at the Atlanta regional Fed bank.

It suggested that regulators were preparing for a rerun of housing-related
losses that plagued many banks after the residential property bubble burst, the newspaper said.

Fed sources said the intent was to provide examiners who work directly with banks with training they might need to evaluate emerging risks.

Conway's report predicted commercial real-estate losses would reach roughly 45 percent next year, the Journal said.

According to the paper, the report said that the most "toxic" loans on bank
books were interest-only loans, which get no benefit from amortization, since it requires borrowers to repay interest but no principal.

The Journal said the report also stated that banks have been slow to absorb
the losses on their loans, partly due to "capital preservation" concerns.

(Reporting by Biswarup Gooptu in Bangalore; Additional reporting by Glenn Somerville in Washington; Editing by James Dalgleish)

By calling this a training exercise, the Fed is attempting to downplay it. However, the the training exercise may be real. This is why it is important to watch what the Fed does, not what it says. What it says is more likely to be caluculated lies or propaganda. But this tells me that they really are worried about CRE. And by the way, 45% losses means at least $750 billion in bad loans and probably $400-500 billion in losses. This is much worse than I previously thought. That's why I'm spending so much time on it.

And I have one question as I look at the stock market today:

IF THERE'S INFLATION AND THE DOLLAR IS GOING TO COLLAPSE, WHY IS THE BOND MARKET GOING CRAZY?!!?!?!