The US’s Next Property Crisis (GFC Redux)

Remember the Mortgage Backed Securities (MBS), the collapse of which precipitated the GFC?  These were ‘cleverly’ repackaged residential mortgages allowing Wall St to capitalise on the residential housing boom in the US leading up to 2007.  They were awesome until prices came off and this multi-leveraged mountain of debt underneath nearly brought the world to its knees.

There has been a lot of press over the last few weeks about the dangers lurking in the US retail (particularly big malls) property space.  Whole malls are left empty across the nation and traditional retail is on a terrible slide amidst tightening wage growth and the on line retail phenomenon.  So far this year alone the US has seen over 3,500 stores close. 

Property research house Green Street Advisors recently reported that one-third of US malls are at “high risk” of shutting down.

The commercial equivalent of the MBS’s that saw the GFC come about are Commercial Mortgage Backed Securities (CMBS).  For scale perspective it is around $1 trillion in size. 

The total commercial mortgage market is around $3 trillion and the size of the MBS market before the GFC has been estimated at around $1 trillion also.

Like the lead up to the GFC we are starting to see cracks form in the underlying property market, only this time it’s commercial. Delinquency rates on commercial mortgages are on the increase with estimates of them almost doubling to 5.75% this year.  More broadly Standard & Poors have recently warned defaults rates for real estate loans could be as high as 13% this year, nearly double that of the last 2 years.

Investment management house giant Morningstar have joined the chorus warning that $48 billion of commercial mortgages could soon be impaired due to the collapse of these malls.  When the big anchor stores like Sears and Maceys close, as they are across the country, the specialty shops in those malls then often leave or go broke through lack of traffic.

Adding to the concern is of course the ‘tightening’ cycle expected out of the US Fed which will see rising interest rates at a time when around $100 billion of these mortgages are due to mature this year.  So these businesses, already struggling, need to somehow secure and service new loans in a rising interest rate and declining revenue environment and with tightening credit conditions from wary banks.  Should that mix see more falls in property values you could well see another GFC type CMBS rout.