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Fed Chairman Ben Bernanke recently came -- told a senate committee that he's worried about another bubble this time the bubble so that he commercial real estate.
Is that about to burst well Peter Avalon is with me this morning smartly advisors -- a managing partner and you say.
Peter among other things that the government is not doing enough to recruit to correct this book or can they do anything to correct this bubble that may or may not -- in commercial real -- well not really.
Because the problem is.
Is -- very pronounced.
In the situation we have right now is akin to a perfect storm as far as commercial real -- owners are concerned.
Not only are they dealing with the effects of this very very deep recession right.
But additionally lending as we knew it.
As recently -- two years ago ceased to exist but let's talk about you say very pronounced the numbers that we put that -- today at three to have trillion worth the commercial real estate.
Expecting almost 5% -- -- to go into default.
What's your prediction and that's a lot that's not my prediction -- -- basically that's prediction of some economists that I looked at the numbers.
And gone through a very in depth analysis but.
Remember that that amount is only the amount owned by commercial banks and represents only 50% of the market.
The additional 50% of the market when loans originated by investment banks.
Commercial mortgage backed securities.
The other quarter -- loans originated by insurance companies hedge funds and the like OK so the question becomes one.
Of timing among other things but there's these resets that we're expecting over the next few years and people are worried about what is the timing of terms of concern -- how.
You know macro economically this might affect people living their day to day lives -- say -- -- bottomed out it's turning.
Is this is other people said it is really the next year that will drop in what will that look like.
Well there are billions and billions of dollar.
Over the course of the next few years and commercial mortgage backed securities tend to have a maturity of 357.
Or ten years.
I saw one estimate which assume that 20% of all the hotel loans.
Which have to reset this year apparently.
Approximately eight billion dollars worth.
May actually going to default.
And the hotels is there is a rough business obviously travelled being down but you sound like they're going to be able to make up for this in other words this is.
Pretty much their faith that anything that could stop that from happening -- not really any of them you know one of the more famous hotels in our lifetime the Watergate.
In Washington DC defaulted on their mortgage so because freezer is happening there could happen anywhere it can happen anywhere now with somebody watching let's it will was the government -- in just by some of the -- And clean up the mess altogether why can't go to the government has decided to buy some of the debt but the -- they've decided to buy or they knew were issued commercial mortgage backed securities.
Those -- the deals that don't have problems the deals that have problems -- the deals that were originated based on an economic model which no longer exists.
And that and so that's in other words you you -- a law and took about three years ago and you're making certain assumptions and those assumptions are just completely out the window right now.
Yeah for example you know -- in all a new owner of an office building in Manhattan.
You assume that ran through gonna continue to go up.
Rents are now going down.
He bought the building three years ago paid top dollar.
That loan and that property is down probably 30% in value not only is the equity wiped out but also the debt.
You know it's interesting I was sort of go back to Mike one point on the on the hospitality industry because this this kind of residents have been a lot of people that are traveling -- thinking about it.
And this also speaks to government involvement or lack -- to some extent one thing that could have been done maybe differently is the kind of rhetoric that's been put out -- -- you've made the point that.
-- -- in the administration coming out I guess the AIG.
This situation where there was -- people traveling to -- he's crazy yet vacation to get so much news or or business meetings that that it got so much job attention.
That actually had the reverse effect I'll just have to -- -- -- that the situations have to disastrous I mean there are some.
-- -- properties that are experience -- significant revenue declines every month for the past year.
And those words to prime locations for corporate meetings.
-- that it is sometimes we don't think of the yet.
You know the effects of these types of things when there's was -- -- Peter appreciate you coming thank you aren't so let's something to look out for as scary.
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