We were lucky enough to present at an all day Commercial Real Estate Symposium at the Fed, where the preeminent industry experts from each real estate sector shared what is occurring in their industry. Prior to the meeting, we had been estimating that banks would not recover 20% of the commercial real estate loans outstanding. Now, we feel that the recovery will even be less.
This distress will certainly have an impact on housing, and one that will be both good and bad at the same time.
- Good: As soon as commercial real estate distress hits the banks in full force, solvent banks will need to dispose of residential assets to concentrate on commercial real estate distress. This will create land buying opportunities in the next several months. Builders acquiring land for cheap means the beginning of a recovery.
- Bad: Banks with high commercial real estate exposure are unlikely to lend to the residential sector, and many of these banks will be lucky to survive at all. To determine whether or not your bank has significant commercial real estate exposure, check out their balance sheet, which is usually in the investor section of their website.
The Problem
Property values are now down 35% from the peak, according to Moody’s. We think prices will fall even more as leases expire and the tenants lease less space at a lower rent.
Why is this a problem? Commercial banks own nearly 45% of mortgage debt outstanding. By comparison, the banks own only 21% of the single-family mortgage debt outstanding.
The insolvency of several thousand banks will overwhelm the understaffed regulatory system and it will take at least 3 more years for a healthy banking system to emerge. We expect the government to intervene even more than it has in order to save the US banking system. When this occurs, it could indirectly benefit home builders by providing great distressed land buying opportunities, and by shoring up the banks so the better banks can start lending again soon.
