Economic Update - Bear Stearns' Bum Real Estate, Revealed

Economic Update - Bear Stearns' Bum Real Estate, Revealed

April 24, 2009
By: Dees Stribling, Contributing Editor, Commercial Property News

Bear Sterns Cos. was in the news again Thursday, in case anyone remembers back far enough to recall the last time it was big news--a time when the disappearance of that company into JPMorgan Chase seemed unfortunate, but not necessarily a harbinger of vast financial problems ahead. Which, in fact, it turned out to be.

Now the Federal Reserve has released something of an autopsy for the company, detailing the kinds of assets it accepted from Bear Stearns (the ones JPMorgan didn't want) and which of them caused losses for the Fed since then.

The biggest losses in the former Bear Stearns portfolio, as of year-end 2008? Real estate. As of the end of last year, the central bank had written down the value of the former Bear Stearns commercial mortgage holdings to $5.6 billion, or down about 28 percent. The value of the former Bear Stearns residential mortgage holdings was written down 38 percent, to $937 million.

The latest monthly Moody’s/REAL National All Property Type Aggregate Index was also released on Thursday, indicating that the total value of U.S. commercial properties has retreated to where they were in March 2005. The index measures commercial valuation by surveying changes in sale prices, just as the Standard & Poors Case-Schiller Home Price index does for residential properties.

The latest Case-Schiller index put U.S. residential values back at October 2003, incidentally. Optimistic analysts say that means a bottom is near for housing; their more pessimistic colleagues say, are you kidding? No bottom yet.

In any case, the National Association of Realtors reported that existing house sales dropped 3 percent in March when compared with February, to a seasonally adjusted annual rate of 4.57 million units, and down 7.1 percent when compared with March 2008. The median price of houses that sold during March was $175,200, which was actually an uptick from February, when the median was $168,200. Compared with March 2008, however, the median price in March 2009 was down about 12 percent.

Under the radar screen, which seems to show little but bad news these days, some fairly large commercial property leasing deals are still getting done. For instance, Sanyo Logistics Corp., a logistics services provider and business unit of Sanyo Electric Co., inked a lease this week with landlord ProLogis for 215,000 square feet of recently completed distribution space in southwest suburban Romeoville, Ill., near Chicago. This followed a similarly sized deal in Japan between the two companies last month.

If anything, such deals show that real estate--always a game of relationships--is even more relationship-oriented in the depths of the recession. The Chicago lease is the seventh one between the two companies, and Sanyo now leases roughly 2 million square feet in ProLogis distribution facilities in Southern California, metro Chicago and various locations throughout Japan.

"Customer relationships are the backbone of our operations and have always been important," Doug Kiersey, senior vice president & Midwest regional director at ProLogis, told CPN. "But they're even more critical in this economic environment."

Wall Street had a zig-zag sort of day on Thursday, but the major indices eventually edged upward. The Dow Jones Industrial Average was up 70.49 points, or 0.89 percent, while the S&P 500 was up 0.99 percent and the Nasdaq up 0.37 percent.