Notorious R.O.B.

This is not good news:

After suffering a beating from their exposure to home loans, banks and securities firms are about to take their lumps from office towers, hotels and other commercial real estate. And the losses could last longer than those from the subprime shakeout.

As the economy wobbles and financing costs rise because of the credit crunch, commercial-real-estate values are starting to slide, with analysts at Goldman Sachs Group Inc. projecting a decline of 21% to 26% in the next two years. That means misery for securities firms with exposure to commercial-real-estate loans and commercial- mortgage-backed securities.

Thing is, after the last crash in commercial real estate, lenders and institutions were supposedly far more disciplined.  The WSJ article even mentions that:

If there is a silver lining, it is that the excesses that overtook the U.S. housing market aren’t as prevalent in commercial real estate. Overbuilding of shopping malls, office parks and other commercial property hasn’t been rampant, although vacancy rates are climbing in such markets as Orange County, Calif., and Las Vegas, which have been hit by the weak housing market.

I’m not in commercial lending, so I can’t speak to the truth of this story or not.  But one would think that (a) condo flips didn’t exist in commercial, and (b) the institutions should know better.  That certain markets are hard-hit can’t be denied.

At the same time, unless there is an actual, deep recession, with many companies going out of business, this might be a great buying opportunity for commercial investors with cash.

-rsh

From the invaluable Calculated Risks blog, Vallejo Close to Bankruptcy Filing:

Vallejo, a city of 135,000 outside of San Francisco, moved closer to bankruptcy after negotiations with its labor unions collapsed.

Bondholders will likely be asked to sacrifice some of their investment if the city seeks bankruptcy protection, an attorney for the municipality said last night. Vallejo faces ballooning labor costs and declining housing-related sales-tax revenue, leaving budget officials projecting that money will run out within weeks.

For people who have been hoping that the bottom may have been reached with real estate prices, I wonder what widespread municipal bankruptcy might mean.

Assuming that Vallejo’s municipal unions take the “devil take the hindmost” attitude that most unions do, the city will go bankrupt.  In bankruptcy, I assume the city’s finances will be administered by a magistrate or a bankruptcy judge.  (Although I have very limited experience with Chapter 9 bankruptcy, I did study bankruptcy law generally, so I’m assuming here.)

So.  Once bankrupt, will Vallejo (a) raise property taxes, or (b) lower property taxes?

If you guessed (b), bzzzt, go to the back of the line.

Maybe the court can set aside the union contract (as can be done in bankruptcy) and force the unions to negotiate all over with the now-bankrupt city, with court supervision.  But I don’t get the feeling that Vallejo is going to have a lot of services for the next few years, do you?  What would home prices in Vallejo look like a year from now, I wonder?

CR thinks that Vallejo is just the first in a long line of California municipalities that will be bellying up to the bankruptcy bar.

I think this is a development to watch.  Furthermore, it might not be a bad idea to take another look at your own town/city’s financials.  How’s their income — much of it tied to real estate via property taxes — compared to their pension liabilities and other generosities that cities flush with cash over the past few years have been showering on their public unions?

-rsh