CNBC Squawk on the Street
Feb 26 2009
Transcript:
David Faber: Thank you. Listen, more bad news, of course, you just heard out of the housing sector. New home sales, of course, are falling to another record. but Atlanta Fed president Dennis Lockhart said he’s losing sleep not over the residential side of the real estate market but the commercial side because many banks continue to have a great deal of exposure there as do many insurance companies. Is commercial real estate still yet to build in terms of the crisis?
Well we’re joined by Philip Blumberg. He’s the Blumberg Capital Partners Chairman and CEO and Rick Santelli. There he is. Philip, let me start with you, of course, earlier this week I reported on AIG’s potential — not going to report a loss of over $60 billion on Monday. Part of that due to write-downs on CMBS, real estate owned, we all heard about the Manhattan real estate market in terms of office space declining rapidly. Malls around the country are losing tenants, who are retailers that are going bankrupt. Have we fully accounted for things in this area?
Philip Blumberg: I don’t think the discount has fully been taken into account. All you’ve got to do is track job losses, because those job losses are the leading indicator for the decline in demand for commercial property space. I think there has been significant discounting taken into account when you can buy CMBS at 12 to 14% on the super senior tranche. But if these job losses continue, you can track the commercial real estate market right against it.
DF: So what’s the play here and what should we expect in terms of further potential write-down’s again from the banks?
PB: Well, here’s the problem. We’re not getting the write-downs from the banks because they’re sort of in a form of suspended animation. Not knowing what the next bailout will be causes them to be reluctant to take the kind of write downs that are necessary to get the free market back into action. we’re keeping the free market not free and not flowing because the government interference is creating a big question mark I think in all potential buyers’ minds as to when and where the bottom’s coming.
Rick. Thoughts or questions?
Rick Santelli: Well, the last thing our guest just mentioned, not only in my opinion is it true about the current question you asked on commercial backed securities or real estate but it is true about so many other issues. That the government intervention and programs meant to do a good thing might exactly be doing the opposite by keeping investors from doing what they might do with good research and strategy as the dynamics change based on government programs.
DF: Yeah, you know, agreed here as well, of course. That all began a long time ago, unfortunately. Actually, it began over a year ago with the original bailout of Bear Stearns. Philip, back to you, though, on CMBS and what we can expect in terms of potential losses, specific to AIG, for example or other insurance companies? Where will we start to see this show up? And what are your expectations in terms of how impaired some of these securities are and what it will mean for REITs as well?
PB: It’s going to affect the entire market including the REIT market. Because CMBS is a tranched debt instrument with a series of bonds. It is not a wipeout of the entire loan; it’s impairment of different levels of the loan. I would say, you know that at a trillion dollars, which is roughly speaking what the commercial property sector lending volume has been, we’re going to look at $500 billion to 700 billion in impaired loans. Not wiped out loans but impaired loans. The problem right now is – I mean think about it, you buy at peak market with heavy, heavy debt, what’s going to happen when the market drops? You’re going to have to take a wipeout somewhere, it’s going to be on the borrower’s side and the lender’s side and that’s where we are right now.
DF: I would assume many of those developers in New York City, for example, who are highly levered and watching their per square foot numbers come rapidly down are in a very difficult position. of course, you can’t refinance, correct?
PB: That’s right. There’s no money to refinance. But here’s the other problem. At 80% to 90% when you bought it, you’re now looking at effectively 130% to 140% loans. So any refinancing in today’s market is going to be around 50 or 60%, look at that gap. That’s the problem.
DF: Yep, similar problem like in residential. They didn’t make CDOs out of it.
PB: There you go.
DF: Philip, thank you so much, Philip Blumberg and our own Rick Santelli. Back to you, Mark.
Keywords: CNBC, CPN, CRE, economy, jobs, Philip Blumberg, retail, Squawk Box, Squawk on the Street
