Monday, August 10, 2009

S&P Acknowledges Weak Commercial Property Fundamentals

S&P's latest equity research notes this morning acknowledged the weak and still deteriorating commercial property fundamentals that exist in today's environment. The ratings firm specifically identified two corporations - Winthrop Realty (FUR) and CapitalSource Inc. (CSE) - as having a troubling level of exposure to the imploding realm of commercial real estate.

For Winthrop Realty:
"...we think the loan asset and property operating businesses will be hurt by rising delinquency levels caused by the soft economy"

And for CapitalSource:
"CSE's commercial real estate portfolio deteriorated as impaired loans as a percentage of total lending assets increased to 12.1% from 8.2% in Q1"

In today's universe of investment outlooks, the bear camp continues to maintain that the commercial real estate fallout will cause at least a similar level of market disruption as was provoked by the now decimated residential market. The Bulls have chosen to either dismiss this argument as simply not true, or to cite analytically weak differentiating factors between the nature of the commercial and residential boom cycles; most popularly, we are told that CRE neither overbuilt nor lent to sub prime borrowers.

What Bulls seem to ignore is the fact that residential defaults/foreclosures have mostly been the result of millions of individual "business" decisions. That is, the homeowner has realized that he is underwater, and has punted the mortgage accordingly. In commercial real estate, this process will play out even more efficiently to the downside, as all pride/personal affection towards the subject property is thrown out the window. These decisions will be made strictly according to the numbers; and the numbers aren't good.

*no position in FUR or CSE

InfoNgen facilitated this post's research Sphere: Related Content

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