All is Lost...

The CRE world has some pain coming, and no one denies that, but The Great Commercial Real Estate Crash: Mark Your Calendars in this week's WSJ misses the point.

Commercial real-estate securities have been Wall Street’s last claim to dignity. You might remember that Lehman Brothers Holdings in the final days pinned its hopes for survival on the values of its commercial real-estate portfolio.

Last claim to dignity? I must be on a different train - CRE has been the favorite whipping boy for at least the last 7 months. REIT equity prices are more than 40% off their highs, double digit unlevered returns are possible in AAA CMBS, and the AAA CMBX indices are implying the underlyings will experience losses 4 and 5 times history?

pinned its hopes for suvival on the values of its CRE portfolio? The train crash that I witnessed has Lehman moving some of the worst CRE assets out there into a separate entity - it was dumping them, not pinning its hopes for survival on them.

Commercial real-estate loans, including commercial mortgage-backed securities and collateralized debt obligations, total $3.7 trillion. It is only a slow burn right now: Many of those CMBS and CDOs mature in 2010 and 2011

The Fed reports outstanding CRE loans closer to $3 trillion, and a little less than 1/3rd of that is CMBS. The Journal might be double counting CDOs, but its not clear. I'm just roughing the numbers based on others' research, but the refi wave really starts in late 2011 and 2012 - less than 8% of the outstanding CMBS mature in 2009 and 2010 combined, and 2011 & 2012 have less than 9% of the outstanding each; most of those are 10-year loans maturing out of deals underwritten at the turn of the century. Late 2011, and 2012 are a little more problematic because the handful of 5-year loans from '06 and '07 deals start to mature.

Who stands to hurt the most? The list starts with the biggest holders of the loans, which include insurance companies, hedge funds and banks, specifically regional banks...
...investment banks took many of the highest-quality loans, leaving regional banks holding those commercial loans without stable income streams

Assuming, incorrectly, the pain will be felt most in CMBS - insurance companies have deep CRE experience. Before CMBS, they were the primary lenders for the highest quality sponsors for stabilized properties. CMBS stole market share, and insurance companies bought CMBS, but for the most part they picked the highest quality CMBS out there. Its easy enough to find Insurance Companies that failed to invest wisely, but thats for another post.

Regional banks are not big investors in CMBS. Regional Banks are the primary originator of land and construction & development loans (C&D) - the riskiest, shortest term, most likely to blow up loans out there. They didn't do this because the IBs only left these scraps on the table - this has always been their bread and butter because it has the highest risk yield.