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Now Seniors Get To Feel The Bezzle

Posted by Karl Denninger

What Isn’t Happening with the $3 Trillion Commercial Real Estate Market: Loans Falling and Vacancy Rates at Record Heights at 10 Percent.

With commercial real estate, you can learn a lot from what isn’t happening.  We all know that the $3 trillion commercial real estate market is already taking a drubbing in terms of pricing.  CRE prices are down over 40 percent from their peak elevated levels.  Yet with commercial real estate you don’t have the typical headline grabbing stories of individuals being forced out of their homes in foreclosures.  With CRE it is seen as a more calculated business move and those losing their shirts are those who should have known better.  Now this is how things should be but the U.S. Treasury and Federal Reserve have already back stopped the entire banking system so implicitly, the failing of any real estate is now a direct burden to all taxpayers.

What is not happening is a natural stable demand from the market.  Why?  Just like the residential market, commercial properties were over built.  We have years of excess to work off.  That is why I simply don’t buy the notion that we will somehow be back on the run by tweaking a few balance sheet numbers.  The problem is many structures are now built and are sitting vacant yet the loans still need servicing.  Who is going to pay for it?  The U.S. Treasury has already had low key talks about a preemptive bailout for this industry labeled Plan C.

While banks tell the public all is well, their actions speak louder:

If things were improving in the overall economy it is likely you would see a natural demand for CRE loans.  People want to build something or start a new business and loans are easily available so long as you can fill the building.  The chart above shows a very clear pattern.  Less and less loans are being made in this sector.  Do banks know something the public doesn’t?

Larger housing complexes fall in the commercial category.  Typically these are places with more than 4 units at least on the residential front.  Assuming a market demand, you would expect to see permits rise:

The above chart clearly shows anything but this.  This is an important indicator because those who sense the economy is turning are more likely to build additional housing units.  This is a large part of our economy since banking heavily relies on real estate for profits.  That is largely a reason for the gigantic banking bailout while the vast majority of Americans wonder what they got for the $14 trillion in financial backstops.  The chart clearly shows one thing and that is there is virtually no demand for large unit housing complexes.  We are at record keeping demand lows even after all the bailouts.  Why?  Well most of these larger complexes are rental units and the market seems to be flush with these units:

The market is saturated with rentals.  Anyone that is both a landlord and renter will know this.  Many places are offering free HDTVs with a one year contract or even better, a few months of free rent.  Rentals always have a higher vacancy than regular homes because that is the nature of the property.  Renters are more mobile and vacancies are just part of the game.  But the current vacancy rate at nearly 10 percent is putting downward pressure on rent prices.  In fact, the BLS uses an owner’s equivalent of rent and this has been falling:

The interesting thing about the BLS data is that it understated the housing bubble because most people during the bubble shifted to buying overpriced homes while the data series was still focused on rental equivalents.  Now, with such a high rate in rental vacancies and large numbers of foreclosures the BLS is adjusting quickly to the downside and making it look like we are having massive deflation since housing makes up over 30 percent of the BLS CPI measure.  Why is this important?  This factors into many things including the cost of living adjustments many receive.

So all this adds into the fact that commercial real estate has very little pricing power in today’s market.  So what are the too big to fail banks doing?  They are laying the problem off on the public.  This was seen when Morgan Stanley simply walked away from the debt obligation in a San Francisco CRE deal:

“(WSJ) So we’ve discussed the ethics of individual borrowers walking away from their mortgages. (Some say we’ve over-discussed it.) If it’s immoral, as some would say, for a borrower to walk away their mortgage, is it any different for a bank?

Morgan Stanley is doing just that. News reports on Thursday said the bank plans to give back five San Francisco office buildings to its lender-just two years after buying them at the top of the market.

“This isn’t a default or foreclosure situation,” spokeswoman Alyson Barnes told Bloomberg News. “We are going to give them the properties to get out of the loan obligation.”

Sound familiar?

Morgan Stanley bought the buildings, along with five others, in San Francisco’s financial district as part of a $2.5 billion purchase from Blackstone Group in May 2007. The buildings were formerly owned by billionaire investor Sam Zell’s Equity Office Properties and acquired by Blackstone in its $39 billion buyout of the real estate firm earlier that year, Bloomberg reports. One analyst estimates that the buildings are now worth half of what Morgan Stanley paid.”

Now this is fascinating coming from an industry leader who has had its champion in the U.S. government moralizing that people shouldn’t walk away from their debt obligations.  The CRE market is in for a long and troubled road ahead.  Right now much of the data on retail sales is being championed as great but we are comparing it to data that was down in the abyss:

When you hear of those wonderful year over year gains we are going back to early 2009 when the economy was flying off a cliff.  So sure, things are up but what are we comparing it to?

The Federal Reserve has over $2 trillion in questionable assets that they are fighting to keep from an audit.  It is likely many loans in their portfolio are now commercial loans.  The fact that vacancy rates are so high and the employment situation is still dismal, where will the demand come from?  If anything, the best we can hope for is that current spaces get leased out and we start reaching more equilibrium levels of vacancies.  But we are so far away from even that.

What isn’t happening in the CRE market is very telling.  2010 is expected to bring much pain in this market and so far, we have had very little evidence pointing to any upsurge in this market.   And with $3 trillion at stake, any small movements mean big bucks.

All you need to know about how the BLS really counts unemployment in one simple cartoon.

And, as we expected earlier, here is Mr. Biderman’s summation on what will likely one day (after Russian hackers get into BLS emails) turn out to be an advance April fool’s joke by the Bureau of Lies and Stupidity:

TrimTabs employment analysis, which uses real-time daily income tax deposits from all U.S. taxpayers to compute employment growth, estimated that the U.S. economy shed 255,000 jobs in November.  This past month’s results were an improvement of only 10.2% from the 284,000 jobs lost in October.

Meanwhile, the Bureau of Labor Statistics (BLS) reported that the U.S. economy lost an astonishingly better than expected 11,000 jobs in November.  In addition, the BLS revised their September and October results down a whopping 203,000 jobs, resulting in a 45% improvement over their preliminary results.

Something is not right in Kansas! Either the BLS results are wrong, our results are in error, or the truth lies somewhere in the middle.

We believe the BLS is grossly underestimating current job losses due to their flawed survey methodology. Those flaws include rigid seasonal adjustments, a mysterious birth/death adjustment, and the fact that only 40% to 60% of the BLS survey is complete by the time of the first release and subject to revision. 

Seasonal adjustments are particularly problematic around the holiday season due to the large number of temporary holiday-related jobs added to payrolls in October and November which then disappear in January. In the past two months, the BLS seasonal adjustments subtracted 2.4 million jobs from the results.  In January, when the seasonal adjustments are the largest of the year, the BLS will add anywhere from 2.0 to 2.3 million jobs. In our opinion, trying to glean monthly job losses numbering in the tens of thousands or even in the hundreds of thousands are lost in the enormous size of the seasonal adjustments.

In November, the BLS revised their September and October job losses down a surprising 44.5%, or 203,000 jobs. In the twelve months ending in October, the BLS revised their job loss estimates up or down by a staggering 679,000 jobs, or 13.0%. Until this past month, these revisions brought the BLS’ revised estimates to within a couple percent of TrimTabs’ original estimates.

The large divergence between the two results begs the question of what is causing the difference.  While we don’t have an answer today, we will be poring over the data in an attempt to answer that question.

Charles – here’s a hint: FOIA Obama’s TV tour for January. That way you will know what kind of NFP numbers to expect next month.

The economy is so hot, that democrats in Congress are now moving with yet another stimulus package, this one for $170 billion, targeting bankrupt states and formerly surging unemployment (Obama has some TV appearances today; the BLS will be back to its previously scheduled job collapse next month). In other news, Japan did approximately 10 such small scale bailouts even as its market proceeded to keep probing new lows over the last two decades, and as reinvested 3x its annual GDP in comparable such one-time boosts to the economy without doing anything to prevent its current deflationary collapse.

From Dow Jones:

Congressional Democrats are moving ahead with a roughly $170 billion package to spur jobs growth and boost emergency  assistance to the unemployed, Democratic congressional aides say.

The two separate bills are taking shape amid an improving jobs picture, but with unemployment still at 10%. U.S. President Barack Obama will deliver a speech Tuesday at the Brookings Institution where he intends to lay out his own ideas for a narrowly targeted jobs bill, which will overlap with  Congress’s intentions but won’t be identical.

Both the administration and Congress will almost certainly pay for part of their program with some of the $115 billion that bailed out banks have repaid to the Treasury Department.

Some more details on Krugman’s wet dream:

The legislation will likely be split in two. The first part, at around $110 billion, would be considered emergency spending. It would again extend unemployment insurance, food stamp increases and a provision in the stimulus bill that subsidizes private-health insurance for the unemployed. This portion will likely be attached to a giant spending bill this month to fund the federal government, and will be added to the already huge U.S. budget deficit.

A second “jobs” bill would cost up to $70 billion, funded by the bank bailout. It would include more money for highway and bridge building, school construction and repair, and water and sewer projects. A second component would be direct aid to state governments cutting back services and raising taxes, moves that are hurting the economic recovery.

Finally, some repaid bailout funds will be lent back to small businesses directly from the Treasury.

Of course, nobody will have the brilliant idea of actually using TARP repayments (before they are needed to bail out the banking system again some time in late 2010) to actually pay back some of the debt which as of a few months ago has been classified as “unmanageable” by everyone including Mr. Bernanke. But why care about the sovereign default in 4-6 years when there are mid-term elections to be worried about. At least in the meantime, the abovementioned Fed Chairman can teach us all we need to know about Fiscal responsibility, courtesy of a completely “apolitical” and transparent Federal Reserve.

Ratigan cuts to the chase, bypassing the hollow rhetoric by Administration propaganda queen Christina Romer, who can’t beat enough drums on today’s pathologically ludicrous BLS numbers, yet is completely unwilling to discuss how the White House will proceed to recoup any of the taxpayer-subsidized windfalls at Wall Street firms. Any considerations of windfall tax, be they in the form of a Tobin tax, now openly supported by such people as Warren Buffett and John Bogle, or directly imposed, seems to not be on the White House’s agenda currently or any time in the future. How is it so difficult for Obama to understand that Main Street is demanding some quid-pro-quo of firms like Goldman, whose employees are covertly purchasing Ferraris even as excess bank reserves hit another all time record yesterday, and instead of lending money out the banks continue to collect a risk-free 0.25% on these excess reserves, thereby once again picking taxpayers’ pockets.

Yes, we all know they need the cash as they are well aware their balance sheets are in much more deplorable conditions than loose FASB regulations force them to disclose. However, the animosity is growing, and more and more the anger directed at Wall Street is becoming anchored at Obama and his Robert Rubin (i.e., Goldman Sachs) cronies, who despite their assumed ideological adherence, are seeminly much more pro-Wall Street than even previous Republican administrations. This will be a heated issue for the President, especially once details of individual Wall Street record bonuses become all too public.

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