Real Estate: The Coming Problems in Commercial Real Estate
Posted by admin on August 22, 2008 | No Comments
Last week, the rent-regulated Riverton Apartments in Manhattan warned that it may not be able pay a $225 million mortgage payment due in September. If they can’t pay, it would be New York’s largest commercial default to date. Riverton’s debt was packaged into a commercial mortgage-backed security (CMBS), split up and sold as bonds in the spring of 2007. The owners had also assumed that worse case, the low-rent apartments could be sold at the then-high real estate prices.
And thus comes the next stage in the credit crisis. According to the New York Times, Deutsche Bank (DB) held $25.1 billion of commercial mortgage backed securities, Morgan Stanley (MS) held $22.1 billion and Citigroup (C) had $19.1 billion at the end of the second quarter. Lehman Brothers (LEH) is trying to sell about $40 billion of commercial real estate assets, as well as its entire real estate business. Moody’s REAL Commercial Property Price Index has dropped 12% since its high last October.
Over the next six months to a year, mortgages priced during the last throes of the real estate bubble should run into trouble. As these real estate owners try to refinance, costs should be higher, making the problem even worse. This will force writedowns at the banks mentioned above.
Position: Ming is long C and MS.
Filed Under: Real Estate