Wednesday, February 8, 2012

The Looming Shadow of CMBS

Kevin D. Williamson of the National Review just wrote a piece on the looming CMBS bonanza/Armageddon awaiting us all in 2012. As he points out:

"In New York City alone, there’s about $70 billion worth of commercial mortgages — some of which have been sold off as mortgage-backed securities, naturally — coming due this year. The national total is more than $150 billion, or a bit more than 1 percent of U.S. GDP."

You can read the entire article HERE.

Southern Nevada is, of course, no stranger to the world of distressed commercial real estate. In fact, we're probably in close competition with Sacramento for the honor of being the poster child of distressed commercial real estate. I've been tracking the area's distressed CRE since Q3 of 2009, when we had 4.1 million square feet of distressed space, most of it retail. In Q1 of 2012, we've jumped to 15.4 million square feet of distressed space, most of it now in the industrial sector.

The growth was, of course, astounding early in the recession, but has since calmed down to a trickle.

What we're now waiting to see is ... how will things shake out in 2012. Sales of distressed space had a big boost in the second quarter of 2011, notably after's auction of around twenty CRE properties. has another auction set for a couple weeks from now, and that might produce the same jolt to the system.

We had better hope that it does. After just one month of Q1, 2012, distressed space has grown by 4.9 percent. If we continue at that rate, we will see the gradual slide in distressed growth make an unwelcome U-turn. If distressed space keeps mounting at the same rate, Y-O-Y growth for the first quarter of 2012 will be in the neighborhood of 16 percent, the worst number we've seen since the first quarter of 2011, and the first increase

How will this potential flood of CMBS affect the local commercial market? It will drive the value of real estate down even further than it already has, which has the perverse side effect of pushing properties that otherwise would be in decent shape underwater in terms of their loan-to-value ratio, thus perpetuating the cycle. As these properties are snapped up by canny investors, they'll be able to undercut their competitors on rent, which to date is proving the key factor in many of the leases being signed these days.

In a nutshell, the cycle of re-valuing commercial real estate is not over by a long shot. You have to forgive property owners for thinking that the 50 percent plus haircut they've taken on the value of their properties has to represent the end of the cycle, but the looming wave of foreclosures and short sales suggests that it is not. Commercial real estate in Southern Nevada is already selling at below replacement cost, and it looks like those values, and prices, are going to be compressed a bit further before all is said and done. The lesson here - there are deals to be had in Southern Nevada, but only if you want to hold them for the long term. While quick flips are not impossible, especially for properties bought at an absolute premium at an auction, they will probably be the exception rather than the rule for the next few years.

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