Monday, February 2, 2009

Why CRE Goes So Bad So Fast: Vintage

During times of peak rents and occupancy levels there are a lot of loans done using aggressive underwriting parameters, and when market conditions soften those loans all go upside down at once (see a discussion of this and other factors in this post).

Here is an illustration from the New York Times, via Calculated Risk:

[M]any landlords find themselves in a bind because they paid stiff prices for property in recent years and need to cover hefty mortgage payments. On average, Manhattan landlords paid $3,348 per square foot for retail properties in 2008, compared with $538 per square foot in 2004, according to the brokerage Cushman & Wakefield.

Loans underwritten in 2004 based on the lower value will fare much better than loans underwritten in 2008.