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Only Fools are Buying into this Sector

Written By Brian Hicks

Posted August 3, 2009

For quite a while, we’ve spoken in depth about the carnage associated with commercial real estate… and for good reason. While the fools are out buying CRE names on a bogus rally, we’re short simply because the near-term downside is devastating.

That’s because they know that $2.2 trillion of U.S. commercial properties bought or refinanced since 2004 are worth less than original prices. They also know that prices have fallen so much that about $1.3 trillion of properties either lost down payments or are close to losing it.

And that just includes office, industrial, multi-family, and retail properties. Tack on hotels, and you can add billions more to those figures.

Without a doubt, this problem has emerged as the biggest threat to our economic rebound and banks (especially regional banks).

And we’re not the only ones warning…

In addition to the Fed, Deutsche Bank just updated its CRE outlook with Q2 data. Take a good look at how badly the CRE situation has deteriorated since the end of the first quarter.

Here’s where, according to Deutsche, where things stood at the end of Q1 2009.


Now, check out where things stood at the end of the first half of 2009.


Deutsche continues by saying:

  • Speed of deterioration in loan performance is unprecedented, even relative to the early

  • Total delinquency rate reached 4.1% in June, 2.2 times its March level and 3.5 times
    that in December

  • Delinquency rates are likely to soar higher over next 24+ months on billions of dollars of pro forma loans that never stabilized and resetting partial IO loans

  • With 2,158 delinquent fixed rate loans ($27.9 billion) special servicers may soon be under pressure

  • DB CMBS Research projects term losses will reach 4.3-6.3% for the outstanding CMBS
    universe ($31.3-$46.4 billion), and 8.4-12.1% for the 2007 vintage

Yep, things are bad… real bad. And they’re likely to get worse.