Tuesday, February 15, 2011

Commercial Real Estate

The commercial real estate (CRE) delinquency rate as a percent of total loans and leases is showing no sign of letting up from its truly parabolic rise.  This level of delinquency pretty much wipes out all of the net income from performing credits.  A recent report from one of the rating agencies said that over 30% of CRE to be rolled in 2011 did not meet the required standards, whether it be loan to value ratios, debt service, occupancy, etc. Making matters even more difficult is the rising interest rate environment thanks to QE and a struggling consumer.

Howard Davidowitz recently had the following to say about the surplus commercial real estate in the US which helps explain why this delinquency rate will continue to grow.

Online sales have to lead you to question the whole retail selling strategy. We have 21 square feet of selling space for every man woman and child in this country. We already have double of what we need. With the explosion of online sales, what happens to all these retail malls and shopping centers which are marginals? Huge changes are going to be taking place as people continue shopping online.... In the end what do you do with the retail space...This is going to be a huge question for retail in the next ten years, that's why Walmart is starting to build smaller stores, that's why Walmart is building more overseas than they are building here. It's going to be the biggest retail change that we've ever seen."


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