Light At The End Of The Tunnel

Doug Marshall, CCIM
Market Assessment
Published December 8, 2009

In a previous market assessment, I identified seven things that need to occur before commercial real estate lending can return to normal (whatever the new normal is going to be):

1. The overall economy needs to improve
2. Commercial real estate fundamentals (vacancy rates and rental rates) need to stabilize
3. Foreclosures need to occur so banks can cleanse their balance sheets of non-performing assets
4. Weaker banks need to fail
5. Lenders need to extend, amend, and pretend
6. Inflation needs to happen, and
   
7. A new version of the CMBS product needs to be created.

Today's post falls into the first category: the overall economy must improve before lending can return to normal.

Chart of the Day (shown below) is a product of Barron's Magazine, which provides insightful charts that both inform and educate the reader. Rarely can you find a chart which better illustrates how this recession compares to those experienced in the past.

The chart compares the third quarter earnings of most companies that comprise the S&P 500 to other recessions that have occurred since 1936.

Notice the precipitous decline in corporate earnings since the third quarter of 2007. Earnings have been in freefall, having dropped 92% from the third quarter of 2007 to the third quarter 2009 trough, which makes it easily the largest decline on record.

However, on the positive side, the S&P 500 combined earnings has bottomed out and is moving up sharply. Improved earnings are the first step to recovery; but as we all know, employment growth is the real indicator needed to show that a recession is over.

Unfortunately, we are not there yet. In Oregon and Washington, unemployment is expected to continue to rise through the second half of 2010.

But for now, we should realize that the U.S. economy is in the first stage of a recovery. It may be a slow and arduous recovery, but it appears we are in for better days ahead.

Have courage! There's light at the end of the tunnel.

Source: Barron's Magazine Chart Of The Day, November 20 2009

Kicking The Can Down The Road

by Doug Marshall, CCIM
Market Assessment
Published November 23, 2009

In my market assessment dated November 3, I identified seven things that need to occur before commercial real estate lending can return to some semblance of normality.

Some of these are obvious. Others are counter-intuitive. In order to recover:

• The overall economy must improve
• Commercial real estate fundamentals need to stabilize
• Foreclosures need to occur so banks can cleanse their balance sheets of non-performing assets
• Weaker banks need to fail
• Lenders need to extend, amend, and pretend
• Inflation needs to happen, and
• A new version of the CMBS product needs to be created.

Over the past year, some of my readers have criticized my interpretations of what's happened in the commercial real estate market as being far too pessimistic. Maybe they're right. I don't know, to be honest.

But to those who agree with this assessment I make this pledge: whenever I can find worthy commercial real estate news that will provide evidence of a thawing in the liquidity crisis or in the real estate market in general, I will bring it to my readers' attention.

Such is the case in today's market assessment.

Recently, the FDIC, the Federal Reserve, and the Office of Thrift Supervision have published new rules for modifying loans to creditworthy customers. This comes under the category of 'kicking the can down the road.'

This is good news; not only good news but plain common sense, something that seems to be lacking these days. The fact remains that it is in the best interest of both groups - banks and investors - to avoid foreclosure by any means possible.

Regulators are recommending that loans be amended for investors who are on time with payments, even if the real estate isn't performing as well as expected or desired.

The regulators have made it clear, in the new rules, that these kinds of loans by banks will not be classified as high risk.

While the new regulations require banks to be careful and conservative, to say the least, they also approve of the modification - through lower interest rates, extended loan terms, or a longer amortization - of properties currently held that would be foreclosed on otherwise.

It is to be hoped that a lot of banks will be able to extend these loans so that they outlast the current sour economy.

It's going to be interesting to see which banks will be able to extend and modify loans for the sake of their customer base and for their own self preservation. The future of the real estate market will depend on it.

Let's hope that the lending institutions come to see it that way, too.

Sources:
New Rules For Modifying Commercial Property Loans, Seattle Daily Journal of Commerce, dated November 2 2009