While everyone has been focusing on the housing bubble bust, the commercial real estate market is collapsing at a record rate.
Commercial real-estate prices fell 7.6% in May, according to Moody's Investors Service, as both dollar volume and transaction count reached record lows in the nine-year history of the firm's Commercial Property Price Indices...The indexes are down 29% from a year ago and 35% from their October 2007 peak.
That 7.6% drop wasn't a year-over-year drop. It dropped 7.6% in just May.
In April it dropped 8.6%, thus making a two month decline of 16%.
Of course not everyone sees this as a bad thing. This near-Armageddon news for the commercial real estate market could still bring out bottom callers.
The index covering all property types is down 34.8 percent from its peak in October 2007, nearing the range of forecasts of total declines expected by many analysts. The acceleration of recent price drops could mean that the market will soon find a bottom, Moody's analysts said.
Translation: Things are getting worse at an accelerating rate, and have already equaled our worst-case scenario, thus it can't get much worse.
Office vacancy rates hit 15.9% in the second quarter of this year, while rents from office space fell by the most in seven years.
This implosion in the CRE market is filtering into the mortgage loan market with similar effects - near record losses.
U.S. banks have been charging off soured commercial mortgages at the fastest pace in nearly 20 years, according to an analysis by The Wall Street Journal. At that rate, losses on loans used to finance offices, shopping malls, hotels, apartments and other commercial property could reach about $30 billion by the end of 2009.
In contrast to home loans, the majority of which were made by about 10 lenders, thousands of U.S. banks, especially regional and community banks, loaded up on commercial-property debt.
The CRE bust, unlike the housing bust, is striking small regional banks. So far this year 57 banks have failed, more than all of last year.
Now I guess we know what Joint Economic Committee Chairwoman Carolyn Maloney meant when she said the CRE market was a "ticking time bomb".
5,315 commercial properties were in either default, foreclosure or bankruptcy by the end of June. Losses in the commercial mortgage-backed securities market is expected to peak at between 9 and 12 percent of the entire market.
So what is the government doing about it? The Fed's TALF program was designed to address this, but its effect has been minimal at best.
Investors only applied for $669 million of loans using old, or legacy, CMBS, as collateral, Reuters is reporting. No one requested loans from the New York Fed using new CMBS, but that’s hardly a surprise since the market has been frozen since last year.
Considering the amount of commercial loans estimated to mature this year - between $300 and $500 billion - TALF hardly looks like it’s going to save the day.