Why This Real Estate Bust Is Different
Unrealistic assumptions, layers of investors, sky-high prices, and possible fraud will make it hard to clean up the mess in commercial real estate
By Mara Der Hovanesian and Dean Foust
This Issue
November 16, 2009
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When Goldman Sachs (GS) sold complex bonds backed by the Arizona Grand Resort and other commercial properties in 2006, it suggested the returns would be strong. The 164-acre luxury Arizona Grand, set against the Sonoran Desert in Phoenix, boasted an award-winning golf course, deluxe spa, and several swank restaurants. The on-site water park was named one of the best in the country by the Travel Channel. With the resort's new owners planning to refurbish hotel rooms and common areas, Goldman told investors that the renovations would help boost cash flow.
As was so often the case during the real estate boom, the lofty projections didn't pan out. When the economy softened and business travel slumped, Arizona Grand's bookings slipped to 67%, from 80%. The resort defaulted on the $190 million underlying loan in 2009—a hit that alone could largely wipe out investors who bought the riskier pieces of the Goldman mortgage-backed securities deal.
"It's one of the largest losses we have forecasted for an individual loan," says Steve Kuritz, a senior vice-president at Realpoint, an independent credit-rating agency. The property, once valued at $246 million, is now worth just $93 million. A spokesman for Goldman says the pricing on the bonds was in line with market levels at the time and not above what investors could get on similar securities. Grossman Co. Properties, which owns Arizona Grand, didn't return calls for comment.
It would be easy to write off this blowup as just another casualty in the regular boom-and-bust cycle of the $6.4 trillion commercial real estate market. But the Goldman deal, with its unrealistic assumptions, multiple layers of investors, and stratospheric prices, helps illustrate why this downturn is more complicated than previous ones—and will turn out to be far costlier. Already, prices have plunged 41% from the peak in 2007, according to Moody's/REAL Commercial Property Price Index—worse than the 30.5% fall in the housing market from its 2006 apex. "We've never seen this extreme a correction as far back as the data go, which is the late 1960s," says Neal Elkin, president of Real Estate Analytics, the research firm that created the index. Adds billionaire investor Wilbur Ross: "Commercial real estate has gone from being highly liquid at sky-high prices to being extremely illiquid at distressed prices."
To appreciate why this bust is like no other, first consider the typical commercial real estate downturns that used to crop up every 5 or 10 years. The pattern was predictable: When prices for apartment complexes, office buildings, shopping malls, and other properties began to rise, developers sped up their projects to cash in on the bull market. Eventually, some of those developers, unable to fill all the new space, began to default on their loans, and lenders were stuck with the buildings they'd financed. The slump lasted no longer than the time it took for the property glut to be worked down.
TURNING A BLIND EYE
But overbuilding isn't the culprit in this bust. An oversupply of money is what pushed commercial real estate over the edge.
It turns out the same excesses that drove the housing market's crazy rise and fall were present in commercial real estate, too—but they have largely gone unnoticed until now. Bankers, in their haste to make more and bigger loans, blindly accepted borrowers' wildest growth assumptions and readily overlooked other shortcomings on loan applications. They did so in part because they could easily sell their dubious loans to investors in the form of commercial mortgage-backed securities. As the market overheated, it became a breeding ground for fraud: A flurry of new court cases reveals the disturbing extent to which commercial mortgage borrowers may have doctored loan documents.
Anonymous Coward User ID: 742855 11/7/2009 12:37 AM
Re: WTF !! NEWSWEEK : COMMERCIAL REAL BUST IS DIFFERENT AND MORE DIFFICULT !!
While the housing crisis seems to be easing, the commercial storm is still gathering strength. Between now and 2012, more than $1.4 trillion worth of commercial real estate loans will come due, according to real estate investment firm ING Clarion Partners. Analysts at Deutsche Bank (DB) estimate that borrowers will have trouble rolling over as many as three-quarters of the loans they took out in 2007, the most toxic vintage.
For the banks and investors whose money fuels the economy, this presents major problems. Their losses will likely cast a shadow over lending—and, by extension, the overall economy—for years. The market won't fully recover until 2020, says Kenneth P. Riggs Jr., CEO of Real Estate Research, and in cases where "values were over the top...maybe never."
"Lenders were willing to underwrite on his record and the revenue stream of the property," says David D. Ferguson, an attorney who represented Merrill. "But it was a scheme doomed for failure."
Anonymous Coward User ID: 742855 11/7/2009 2:14 AM
Re: WTF !! NEWSWEEK : COMMERCIAL REAL BUST IS DIFFERENT AND MORE DIFFICULT !!
Why This Real Estate Bust Is Different
Unrealistic assumptions, layers of investors, sky-high prices, and possible fraud will make it hard to clean up the mess in commercial real estate
By Mara Der Hovanesian and Dean Foust
This Issue
November 16, 2009
linkedin connections
When Goldman Sachs (GS) sold complex bonds backed by the Arizona Grand Resort and other commercial properties in 2006, it suggested the returns would be strong. The 164-acre luxury Arizona Grand, set against the Sonoran Desert in Phoenix, boasted an award-winning golf course, deluxe spa, and several swank restaurants. The on-site water park was named one of the best in the country by the Travel Channel. With the resort's new owners planning to refurbish hotel rooms and common areas, Goldman told investors that the renovations would help boost cash flow.
As was so often the case during the real estate boom, the lofty projections didn't pan out. When the economy softened and business travel slumped, Arizona Grand's bookings slipped to 67%, from 80%. The resort defaulted on the $190 million underlying loan in 2009—a hit that alone could largely wipe out investors who bought the riskier pieces of the Goldman mortgage-backed securities deal.
"It's one of the largest losses we have forecasted for an individual loan," says Steve Kuritz, a senior vice-president at Realpoint, an independent credit-rating agency. The property, once valued at $246 million, is now worth just $93 million. A spokesman for Goldman says the pricing on the bonds was in line with market levels at the time and not above what investors could get on similar securities. Grossman Co. Properties, which owns Arizona Grand, didn't return calls for comment.
It would be easy to write off this blowup as just another casualty in the regular boom-and-bust cycle of the $6.4 trillion commercial real estate market. But the Goldman deal, with its unrealistic assumptions, multiple layers of investors, and stratospheric prices, helps illustrate why this downturn is more complicated than previous ones—and will turn out to be far costlier. Already, prices have plunged 41% from the peak in 2007, according to Moody's/REAL Commercial Property Price Index—worse than the 30.5% fall in the housing market from its 2006 apex. "We've never seen this extreme a correction as far back as the data go, which is the late 1960s," says Neal Elkin, president of Real Estate Analytics, the research firm that created the index. Adds billionaire investor Wilbur Ross: "Commercial real estate has gone from being highly liquid at sky-high prices to being extremely illiquid at distressed prices."
To appreciate why this bust is like no other, first consider the typical commercial real estate downturns that used to crop up every 5 or 10 years. The pattern was predictable: When prices for apartment complexes, office buildings, shopping malls, and other properties began to rise, developers sped up their projects to cash in on the bull market. Eventually, some of those developers, unable to fill all the new space, began to default on their loans, and lenders were stuck with the buildings they'd financed. The slump lasted no longer than the time it took for the property glut to be worked down.
TURNING A BLIND EYE
But overbuilding isn't the culprit in this bust. An oversupply of money is what pushed commercial real estate over the edge.
It turns out the same excesses that drove the housing market's crazy rise and fall were present in commercial real estate, too—but they have largely gone unnoticed until now. Bankers, in their haste to make more and bigger loans, blindly accepted borrowers' wildest growth assumptions and readily overlooked other shortcomings on loan applications. They did so in part because they could easily sell their dubious loans to investors in the form of commercial mortgage-backed securities. As the market overheated, it became a breeding ground for fraud: A flurry of new court cases reveals the disturbing extent to which commercial mortgage borrowers may have doctored loan documents.
Quoting: Anonymous Coward 811285
Downright massive phony future bussinesses predictions and phony statistics and expectations, drove that foolish lucrative building endeavor. Typical junk bonds were used and poised to emplode later on ..That was the financial fuel that was used again and again to shake down investors continously..A planned financial wreck that enriched again some peoples, off of the backs of investors.. ... yawn.. if it looks like a rediculus moronic expenditure,, then it probably is one.. calculated theft again..by smooth experianced operators at many levels..
the 'Soothsayers' have been predicting this is the straw and we all know the USD cannot absorb more debt to bail this mess out. Fear Profits a Man Nothing.
~
Anonymous Coward User ID: 786291 11/7/2009 4:05 AM
Re: WTF !! NEWSWEEK : COMMERCIAL REAL BUST IS DIFFERENT AND MORE DIFFICULT !!
but the bankster makes money anyways as he wipes out the investor, collects the swap money, writes off the asset and transfers it to another party for consideration (money)and retains vested interest. the losers are the business owner and investors, same shit different pile.
9teen.47™ Time is short. User ID: 812510 11/7/2009 4:18 AM
Re: WTF !! NEWSWEEK : COMMERCIAL REAL BUST IS DIFFERENT AND MORE DIFFICULT !!
the 'Soothsayers' have been predicting this is the straw and we all know the USD cannot absorb more debt to bail this mess out.
Quoting: 907AKdude
I don't really care very much. Zec 12:3 And in that day will I make Jerusalem a burdensome stone for all people: all that burden themselves with it shall be cut in pieces, though all the people of the earth be gathered together against it.
Psa 9:17 The wicked shall be turned into hell, [and] all the nations that forget God.
STOCK UP NOW. You should have at least 6 months worth of basics for every member of your household. Stay away from crowds when trouble starts, do not forget water storage, tobaccos worth more than gold or silver, and be kind to hungry children.
Anonymous Coward User ID: 519048 11/7/2009 5:55 AM
Re: WTF !! NEWSWEEK : COMMERCIAL REAL BUST IS DIFFERENT AND MORE DIFFICULT !!
Let the media madness commence. It will be the new CNBC battle cry for the next round of bailout begging from bankers. Another pretext to cry for taxpayers to foot their foolish gambling greed.
But, I don't think Americans will fall for it this time. Because we know it's a lie. The "it's necessary so main street can get loans" will hopefully rally demonstrations from those whose credit card interests have already risen to usury rates, or those with good credit who are denied money for a car or sound business loan.
They've already taken, taken, taken...from this generation and the next several.
Let them sink. I hope the rest of America feels the same.
Anonymous Coward User ID: 679788 11/7/2009 8:17 AM
Re: WTF !! NEWSWEEK : COMMERCIAL REAL BUST IS DIFFERENT AND MORE DIFFICULT !!
I believe a number of things about the future related to these large investments - these loans provided the derivative to increase the banks lending ability.
now when the loan is non performing TARP will be used in the means it was originally intended. You see the banking sysytem cannot be compromised, so the banks will simply turn these non performing commercial real estate loans to the GOVT. which will then clean there up banks books.
The Govermnet will sell the Realestate at a mojor discount.
Sounds simple but in the process the default call on these derivatives backed by commercial properties will spin out of control because of its incestous nature now involving countries,and Goverments and pensions and so on and so on.
How did we get here, previously as afar back as the last recession and the S&L crissis of the Late 80 early 90, Banks could not sell securities or insurance. When we had the drop in wall street stock in th eend of the internet boom of 2000 We were all safe because these instruments and instatutions were not allowed to do business together.
Not since the great depression of the 1930 have we been this position and as the artice says will take a decade or more to recover, but only if we reverse the legislation created wich allowed this to occur and change lending practices at Fannie and Freddie. ( Glass Stiegal and Grahm Rudman sp).
The egg is cracked and cannot be put together again so we need a new chicken to lay anew egg, We may not like the look of the new eggs
Eagle # 1 User ID: 802743 11/7/2009 9:54 AM
Re: WTF !! NEWSWEEK : COMMERCIAL REAL BUST IS DIFFERENT AND MORE DIFFICULT !!
AC 436743 .... All you said was right EXCEPT, you forgot that the Demoturds are IN POWER for the next THREE years, and they LOVE to spend you childrens/grandchildrens MONEY, WITH the interest/USURTY ATTACHED !
I don't really think we have ANY chance to stop the NWO now, as the BANKSTERS of the World ARE and WILL be in control as LONG AS the Demoturds in Washington keep passing bills in THEIR favor, NOT OURS !
There ARE 17,000,000 Laws, Rules and Regulations already ON the BOOKS (Local, state and Federal ) ! With PUKElosi and 'Bend Over' Barney Franks in DC to BACK the ILLEGAL, ALIEN FRAUD and LIER in office, the situation of the 'leaky ship of state' WILL NOT get better, after we go OVER the financial FALLS that is just around the bend in the river of life !
Eagle
Anonymous Coward User ID: 802743 11/7/2009 9:57 AM
Re: WTF !! NEWSWEEK : COMMERCIAL REAL BUST IS DIFFERENT AND MORE DIFFICULT !!
The big boys are grabbing infrastructure. Warren Buffet is not anyones friend.. well maybe Obama's who is doing nothing for the MIDDLE Class according to this interview.
Warren can borrow to by railroads but you can not borrow to buy a car to get to work. Some Governement that OBAMA is running... Wait till say 2025 when Obama is long gone and the "KIDS" that voted their Internet Hero into office have to pay for his bills... Health Care, and the Bank Bail out and the friggen Stimulas that was to keep Unemployment to 8 %... Those were his words.. not George Bushes. He wanted the Stimulas to make jobs... and we are going the wrong direction.
Golden slags has cropped up at the start it might be good to read the UK times newspaper on Sunday as there will be an article that charts there rise to be the best at what they do may be a truth will slip out
Last Edited by bill shitters on 11/7/2009 at 12:33 PM The retired thread killer
"Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose." - John Maynard Keynes, 1919
[link to en.wikiquote.org]
"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved." - Ludwig Von Mises, Human Action, a Treatise on Economics, (Fox & Wilkes, 4th rev. ed., 1963)
[link to en.wikiquote.org]
Eagle you are a qualified idiot. This has nothing to do with democrats and republicans it has to do with crooks, those who call the shots of both parties.
Banks under banking laws which were brought in under a completely republican dominated house, senate and executive branch were finally allowed to go into the insurance buiness and insurance companies were also then permitted to go into the banking buiness. The only thing denied to them as legilsation was for either of them to go into real estate directly but they are both in it up to their eyeballs using foreclosures, auctioned properties and
marketing REOs.
Furthermore the banks got it though legislation with respect to altering the bankruptcy laws during this time to make is severly punitaive to file for one as to individuals and small businesses.
This has been the objective for decades what we are seeing and it is a way hell of a long way from being over no matter what the news states.
This is extraordinary social re-engineering and theft of real wealth.
Anonymous Coward User ID: 730517 11/7/2009 2:36 PM
Re: WTF !! NEWSWEEK : COMMERCIAL REAL BUST IS DIFFERENT AND MORE DIFFICULT !!
Michael Moore and Arianna Huffington agree that we have not had capitalism.
Quoting: Anonymous Coward 730517
Capitalism will always morph into corporatism. They're not one and the same, but they are inextricably linked. Humans haven't stumbled onto the right system yet. There may not be one. As long as we're humans with greed as one of our traits, we can't be trusted to make the right decisions. Rich or poor.
Anonymous Coward User ID: 519048 11/7/2009 6:01 PM
Re: WTF !! NEWSWEEK : COMMERCIAL REAL BUST IS DIFFERENT AND MORE DIFFICULT !!
In other news, as we dwell on domestic issues, the G20 swiftly deals a death blow to US sovereignty -
BREAKING - G20 - Communique out Scotland - Does our US Constitution mean anything anymore? (Point 5)
It's really very simple. American are being swindled and looted of their wealth by the Brit Banksters.
The Brit Banksters and their multinational corporations and their mafia unions are working in concert to destroy middle class businesses and the American Middle Class.
The Brits always loot a nation as they leave.
Anonymous Coward User ID: 811893 11/7/2009 6:17 PM
Re: WTF !! NEWSWEEK : COMMERCIAL REAL BUST IS DIFFERENT AND MORE DIFFICULT !!
While the housing crisis seems to be easing, the commercial storm is still gathering strength. Between now and 2012, more than $1.4 trillion worth of commercial real estate loans will come due, according to real estate investment firm ING Clarion Partners. Analysts at Deutsche Bank (DB) estimate that borrowers will have trouble rolling over as many as three-quarters of the loans they took out in 2007, the most toxic vintage.
For the banks and investors whose money fuels the economy, this presents major problems. Their losses will likely cast a shadow over lending—and, by extension, the overall economy—for years. The market won't fully recover until 2020, says Kenneth P. Riggs Jr., CEO of Real Estate Research, and in cases where "values were over the top...maybe never."
"Lenders were willing to underwrite on his record and the revenue stream of the property," says David D. Ferguson, an attorney who represented Merrill. "But it was a scheme doomed for failure."
Quoting: Anonymous Coward 811285
All true except the housing market is NOT easing. There is another trillion dollars in the home real estate market subject to foreclosure. These are the ARM and ERISA (sp?) loans.
There is only a lull in the housing market collapse. This lull was fully predicted by Credit Suisse statistics.
The new titdal wave is only beginning. It started in October and will double in March of 2010. By then the economy could be so bad that it could go far worse than double.
Watch this video, At the 3:30 mark or so you'll see the overlaying waves. Pause the video and examine the month by month progression.
You will shit your pants. While March is a doubling of the ARM and ERISA collapse, it grows far worse.
''"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved." - Ludwig Von Mises, Human Action, a Treatise on Economics,''
We know this. But do we BELIEVE IT?
"there is NO means of avoiding"
None, nada, zip, fhhagit-aboud-it! Get it?
IMHO The Depression hasn't even started yet.
Gold will be $160/oz before this is over and gold will be the *highest* priced thing around.
Anonymous Coward User ID: 768705 11/7/2009 7:46 PM
Re: WTF !! NEWSWEEK : COMMERCIAL REAL BUST IS DIFFERENT AND MORE DIFFICULT !!
thanks for the info OP. though really the only big difference is that the wealthy are now going to get sucked into the shit storm the rest of us have been trying to navigate through for the past 2-3 YEARS. oh well suck it up fuckers. welcome to the REAL world.
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