It shouldn't be a surprise that commercial real estate and CRE debt markets continue to de-lever and re-price during this recession. Toxic commercial real estate was levered up just like the housing market and the "other shoe" is falling as we speak as unemployment increases, cash flows dwindle, Rent/FFO declines, vacancies and delinquencies increase and properties underwater become hard to refinance. Banks exposed to this toxic CRE debt will see their capital position deteriorate further. This is why the Government (essentially the taxpayer) is trying to backstop bank stress and jump start the CMBS (CRE debt securities) market.
I've been watching this market for 2 years now and this cash crunch will MURDER sub-prime CRE debt originated at 100% LTV (loan-to-value) at the height of the CRE bubble. On a positive note Big REITs recently raised equity to pay down debt (Simon Properties, Vornado, Kimco, Acadia, Kite Realty). The commercial real estate market is still distressed and might need a TALF/PPIP backstop if realized CRE deflation poses a systemic threat. Of course that would mean rigging the market of natural price discovery.
The Joint Economic Committee held a hearing (Webcast: Commercial Real Estate: Do Rising Defaults Pose Systemic Threat?. Here are quotes from the hearing. Visit link above or click the photo to be redirected to the hearing.
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