The Impending  Commercial Real Estate Crisis  Simply Explained by Gregory Wharton   AIA  RIBA  LEED® AP Copyright © 2009 -...
Where We Started <ul><li>CRE Bubble Peaks </li></ul><ul><li>Inflated Prices </li></ul><ul><li>Relaxed Underwriting Standar...
Recent History <ul><li>Asset Values Decline </li></ul><ul><li>20% average drop from high puts many loans “under water.” </...
Conventional Loans Reset <ul><li>“ Margin Calls” Abound </li></ul><ul><li>Conventional loan terms may force restoration of...
Refinancing Problematic <ul><li>Money Dries Up </li></ul><ul><li>60/40 LTV now standard in CRE loan underwriting. </li></u...
Near-Term Expectations <ul><li>2010: Another Down Year </li></ul><ul><li>Downward price momentum not easing. </li></ul><ul...
Priced-In Losses as of Now <ul><li>Market Expectations </li></ul><ul><li>Underwriting standards are pricing in an expected...
More-Likely Scenario <ul><li>Severe Correction Ahead </li></ul><ul><li>Reversion to historic valuations </li></ul><ul><li>...
The Worst-Case Scenario <ul><li>Complete De-Leveraging </li></ul><ul><li>Failure of capital markets </li></ul><ul><li>Inve...
What’s At Stake? Copyright © 2009 - John Gregory Wharton 90% LTV 60% LTV 112% LTV 68% LTV $20mm $10mm $30mm $90mm $10mm -9...
What’s At Stake? EXAMPLE PROJECT Copyright © 2009 - John Gregory Wharton $4.0t $3.5t $4.0t $3.0t $1.5t $1.0t $2.0t $4.5t $...
Compare to Sub-Prime? SUB-PRIME MORTGAGE MARKET $4.0t $3.5t $4.0t $3.0t $1.5t $1.0t $2.0t $4.5t $500b -90% THE ENTIRE CRE ...
A Conservative Outlook <ul><li>No recovery before 2015 at the earliest. </li></ul><ul><li>$2.5 to $4.5 trillion in capital...
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The Impending Commercial Real Estate Crisis Simply Explained

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The sub-prime mortgage collapse starting in 2007 was a serious hit to our economy. Yet, some analysts are warning that an even bigger hit, this time originating with commercial real estate, will be arriving soon. What is this impending CRE collapse, and why should we be so worried about it?

Published in: Economy & Finance, Business
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  • In short? Yes, they're delusional.

    The math of this situation is inescapable, and now that Moody's REAL CPPI is down 43% off its 2007 highs and back to Jan 2003 levels, the piper will have to be paid sooner rather than later. Any bank that is holding paper on CRE is probably insolvent, and many REITs are in deep, deep trouble.
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  • Gregory that is an excellent presentation using visuals in a very clear way. Given that what is your take on the current recovery of the publicly traded REIT sector that has doubled in value since its low back in March of 2009.

    Are investors delusional?
    Are REITs better managed and less leveraged than the overall commercial real estate sector?
    Have operation fundamentals recovered better than you anticipated and the resulting recovery in REIT share prices are well supported?

    I am really interested in your answers.

    Gaetan 'Guy' Lion
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The Impending Commercial Real Estate Crisis Simply Explained

  1. 1. The Impending Commercial Real Estate Crisis Simply Explained by Gregory Wharton AIA RIBA LEED® AP Copyright © 2009 - John Gregory Wharton
  2. 2. Where We Started <ul><li>CRE Bubble Peaks </li></ul><ul><li>Inflated Prices </li></ul><ul><li>Relaxed Underwriting Standards </li></ul><ul><li>Non-recourse loans </li></ul><ul><li>Cheap Money </li></ul><ul><li>Highly Leveraged </li></ul><ul><li>Securitization of Loans </li></ul>90% LTV $10mm PEAK EXAMPLE PROJECT Copyright © 2009 - John Gregory Wharton
  3. 3. Recent History <ul><li>Asset Values Decline </li></ul><ul><li>20% average drop from high puts many loans “under water.” </li></ul><ul><li>Equity wiped out. </li></ul>90% LTV 112% LTV $10mm -20% EXAMPLE PROJECT MIT CRE TBI Chart - http://web.mit.edu/cre/research/credl/tbi.html Copyright © 2009 - John Gregory Wharton -20% unrealized loss… mark to market?
  4. 4. Conventional Loans Reset <ul><li>“ Margin Calls” Abound </li></ul><ul><li>Conventional loan terms may force restoration of 80/20 LTV at new, lower prices. </li></ul><ul><li>FASB rules: Mark to Market. </li></ul><ul><li>Banks demand cash to cover. </li></ul><ul><li>Bank failures looming. </li></ul>90% LTV 80% LTV 112% LTV $20mm $10mm $16mm -20% EXAMPLE PROJECT Copyright © 2009 - John Gregory Wharton
  5. 5. Refinancing Problematic <ul><li>Money Dries Up </li></ul><ul><li>60/40 LTV now standard in CRE loan underwriting. </li></ul><ul><li>Risk premiums boosting loan rates despite historic lows on Prime Rate and LIBOR. </li></ul><ul><li>Banks holding cash. </li></ul><ul><li>Special Services over-whelmed. </li></ul>90% LTV 60% LTV 112% LTV $20mm $10mm $32mm -20% EXAMPLE PROJECT Copyright © 2009 - John Gregory Wharton
  6. 6. Near-Term Expectations <ul><li>2010: Another Down Year </li></ul><ul><li>Downward price momentum not easing. </li></ul><ul><li>Pressure mounting. </li></ul>90% LTV 60% LTV 112% LTV 68% LTV $20mm $10mm $30mm $22mm -30% -30% Linear Projection EXAMPLE PROJECT MIT CRE TBI Chart - http://web.mit.edu/cre/research/credl/tbi.html Copyright © 2009 - John Gregory Wharton
  7. 7. Priced-In Losses as of Now <ul><li>Market Expectations </li></ul><ul><li>Underwriting standards are pricing in an expected asset value drop of at least 40%. </li></ul>90% LTV 60% LTV 112% LTV 68% LTV 80% LTV $20mm $10mm $30mm $40mm $12mm -40% -40% Implied Expectation EXAMPLE PROJECT MIT CRE TBI Chart - http://web.mit.edu/cre/research/credl/tbi.html Copyright © 2009 - John Gregory Wharton
  8. 8. More-Likely Scenario <ul><li>Severe Correction Ahead </li></ul><ul><li>Reversion to historic valuations </li></ul><ul><li>Significant de-leveraging </li></ul>90% LTV 60% LTV 112% LTV 68% LTV 80% LTV $20mm $10mm $30mm $40mm $12mm -50% -50% Reversion to the Mean EXAMPLE PROJECT MIT CRE TBI Chart - http://web.mit.edu/cre/research/credl/tbi.html Copyright © 2009 - John Gregory Wharton
  9. 9. The Worst-Case Scenario <ul><li>Complete De-Leveraging </li></ul><ul><li>Failure of capital markets </li></ul><ul><li>Investors wiped out </li></ul><ul><li>Deflationary spiral </li></ul>90% LTV 60% LTV 112% LTV 68% LTV $20mm $10mm $30mm $90mm $10mm -90% -90% Regression to the Mean EXAMPLE PROJECT MIT CRE TBI Chart - http://web.mit.edu/cre/research/credl/tbi.html Copyright © 2009 - John Gregory Wharton
  10. 10. What’s At Stake? Copyright © 2009 - John Gregory Wharton 90% LTV 60% LTV 112% LTV 68% LTV $20mm $10mm $30mm $90mm $10mm -90% EXAMPLE PROJECT $4.0t $3.5t $4.0t $3.0t $1.5t $1.0t $2.0t $4.5t $500b -90% THE ENTIRE CRE MARKET $1.0t
  11. 11. What’s At Stake? EXAMPLE PROJECT Copyright © 2009 - John Gregory Wharton $4.0t $3.5t $4.0t $3.0t $1.5t $1.0t $2.0t $4.5t $500b -90% THE ENTIRE CRE MARKET $1.0t
  12. 12. Compare to Sub-Prime? SUB-PRIME MORTGAGE MARKET $4.0t $3.5t $4.0t $3.0t $1.5t $1.0t $2.0t $4.5t $500b -90% THE ENTIRE CRE MARKET $1.0t $350b $100b $750b $1.5t $2.0t $1.9t $2.0t $1.5t Asset Value Data – Case-Shiller Index Copyright © 2009 - John Gregory Wharton
  13. 13. A Conservative Outlook <ul><li>No recovery before 2015 at the earliest. </li></ul><ul><li>$2.5 to $4.5 trillion in capital losses (more than twice sub-prime). </li></ul><ul><li>Possibility of multi-decade deflationary stagnation like 1990s Japan </li></ul><ul><li>Dramatic reduction in size of capital markets and liquidity. </li></ul>$4.0t $3.5t $4.0t $3.0t $1.5t $1.0t $2.0t $2.5t -50% THE ENTIRE CRE MARKET $1.0t $2.0t $500b Copyright © 2009 - John Gregory Wharton

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