Thursday, December 18, 2008

Dallas Fed Is My Kind Of Bank

Say all you want about Dallas, but the Federal Reserve Bank there is top notch. I have mentioned several times how much I admire the Fed Chairman from there, Richard Fischer, and the letter he had in April was spot on.

The article that they are talking about this month has to do with commercial real estate (I love these guys!).

You can read the whole thing here.
Some things I found useful: Stock of commercial buildings ($3 Trillion Dollars) Stock of residential buildings ($14.5 Trillion Dollars). These were 2007 numbers, the height of the run-up in prices.

Real Prices for Office and Retail (Industrial you are not immune) are declining.

Architectural Billings are lower (these are projects that are in the pipeline). 2009 is not looking so great for architects, and by extension developers, and by extension anybody in the real estate biz.
This will have extensions to the overall economy in two ways. First, construction spending has an incredibly high multiplier and is a huge stimulus to economies. Second, a fall in property values will reult in losses to the banking sector.
Construction is volitile. It is super-cyclical and leads overall GDP. Commercial construction has turned down, in virtually every recession since 1970. In 2001, commercial construction contracted 18 percent.
In the current cycle, things look ok, at least from an investment standpoint.

2001 was worse that the current situation, in regards to CRE investment. The blue line represents deviation from trend, so it can be a little tricky since these reflect the cyclical components of what is going on. (This also assumes that the trend is known and constant.)

This last chart I am going to show is kinda scary. (read the damn article if you want all the charts!) These are delinquency rates for loans. And the loans are deteriorating (nobody cares about loan quality when prices are rising, but as soon as things get bad, people get hurt).

In short, tougher times appear to lie ahead.

Worsening macroeconomic conditions, particularly in the retail and other service sectors, are hurting CRE fundamentals. Meanwhile the intensification of the credit crunch is dampening market activity.

And if commercial property’s situation does grow worse, banks are likely to face further losses.

One factor that might limit these risks is that the commercial real estate sector wasn’t as grossly overbuilt heading into the current economic slowdown as it had been in the early 1990s.

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