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REIT reality check: Commercial real estate loan defaults skyrocket

March 26, 2009 – Comments (5) | RELATED TICKERS: SRS , URE , RWR

Story:  Commercial real estate loan defaults skyrocket

Vacancies at retailers, Nadji forecasts, will shoot up to 11 percent by year-end, matching the peak of the early 1990s. Office vacancies are likely to hit 18 percent by year-end, he said, short of the 1990s-era peak of more than 20 percent.

The commercial real estate market is "at the precipice," a report by Detusche Bank said earlier this month. So far this year, delinquency rates are up to 1.8 percent of loans in March, more than four times the year-ago level.

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Drops in property values of 45 percent from a peak in late 2007 are possible, Parkus said, exceeding those of the early 1990s, as demand for office, retail and other commercial space plummets amid a worsening economy.

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Funding for commercial loans virtually shut down last year as the financial system unraveled.

There was $12.2 billion in commercial mortgage debt issued last year, the lowest figure since 1991 and down 95 percent from 2007, according to a report by Reis.

Making matters worse, about $216 billion in loans are coming due through 2012.

That is putting landlords in a squeeze.

About $11 billion of distressed commercial property is currently up for sale, compared with a lackluster $2.7 billion worth of properties that were actually sold in February, according to Real Capital Analytics.

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The asset writedowns are currently underestimated by many REITs if the average value could drop 45% from peak.

Credit downgrades and tightened credit conditions by banks have made REITs hard to raise money.  GGP going bankrupt soon can worsen the issue (like LEH was doing to other i-banks)

Unemployment stays high will make consumers cut spendings. Office and retail vacany will cut FFO of these REITs greatly. Business owners are hurt by economic downturn will want to lower their rents.

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We had near 1500pt DJIX rally from the low on hopes and cooked economic data. Only few fundamental changes like Fed buying 300B T-bond and printing countless greenbacks.

Don't get me wrong. I dislike financial sector and REITs because they are either greedy or over-leveraged. However, I like real product companies like JNJ, PG, AA, DOW, INTC, MSFT, IBM, DP, etc. Even though they may be over-expanded because they has been fooled by the US bubble economy.

Unfortunately, people working for fiscal responsible firms are getting laid-off sine their companies didn't get any bailout from the US government.

We'll see when earnings start to come out in April.