CREs in Trouble

If we are to believe the people smoking and inhaling green shoots, then things are improving and even less bad is now good.
Hhm, then riddle me this.

A post on Big Picture points  us to a story, which originally ran on the NYT, displaying some nice charts on the state of bank loans.

Banks Loans

Banks Loans charts on NYT

Unfortunately, the graphs don’t show what that means in real $ amounts for real estate, commercial and industrial and credit cards loans, but it’s probably not wrong to assume that the commercial and industrial loans are the biggest chunk.

What seems to be happening here is that people are defaulting or are in arrears with their payments in real estate, i.e. mortgages payments and in credit card payments. They will undoubtedly have to cut back even more on consumption.

Which brings us back to the commercial real estate.

The problems facing those loans can be illustrated with this article on Bloomberg. Since the businesses in malls are no longer as profitable as they once were, tennants have to cut back and need to reduce spending. Among other measures, they are negotiating a reduction in rents with their landlords. In the case of Starbucks this could amount to a cut of up to 25% in the rents in their US locations. Starbucks is probably not the only company to do that.

This is going to have an impact on the ability of the landlords to pay back their loans and will affect the banks who underwrote those loans – and we are not even talking about any dervatives theses loans have been packaged into.
As a sidenote, I note that the banks here might be at least in part the usual supects, e.g. JP Morgan, Citi, Bank of America, Deutsche Bank, Credit Suisse, Goldman Sachs, Morgan Stanley, UBS and the rest of the tight familily ‘invited-members-only’ society.

In the UK, the head of restructuring at KPMG predicts:

Richard Fleming, UK head of restructuring at accountant KPMG, said that property failures to date are just the “tip of the iceberg”.Mr Fleming said: “Our work on the JJB [Sports] CVA and the Lehman real estate portfolio in Asia has given us an insight into what we think is just the tip of the iceberg. We predict a wave of fallouts in the commercial property market as the true value of losses becomes apparent.”

This is of course not representative, but as I pointed out in a previous post, I think the CREs and with it the CMBSs are in trouble, which might lead to a further need in write-downs and write-offs and as this happens, it will trigger some LCDSs.
Forgive me for not being enthusiastic about the green-shoots. I don’t smoke and I don’t inhale.