Yesterday Howard Lindzon posted a nice interview with Paul Kedrosky in which Kedrosky said get long CRE. I’m still really interested to understand those who are long CRE, or any of the CRE ETFs. Kedrosky’s argument was essentially that the dropoff in loan quality in CRE isn’t as dramatic as it is in residential real estate and that there are some things you can do to smooth out the impact of the large numbers of non-performing loans in the market. This is counter-intuitive to me, though I am admittedly not the expert on where the publicly traded companies are in terms of recognizing current market in their valuations.

I would think if anything, companies typically try to prolong the day of reckoning and hide the pain as much as they can so that they don’t have to admit to their shareholders that they screwed up. That’s a behavioral trend that is pretty much universal. Screw up, deny, deny, deny, then admit things are bad and have been so for a long time and this is old news (see public homebuilders). So betting that either the public real estate companies have been upfront in their filings, or that the market doesn’t believe them and is discounting them sufficiently to cover the difference. It strikes me that for a lot of REIT inventory, there isn’t any there there. Meaning that when you pull out the debt, there isn’t any value. So what’s a company worth when their assets are equal to their liabilities? Even if the portfolio is currently cash flowing, that’s not guaranteed to go on forever. Eventually loans come due.

At any rate, this is an excerpt from a Miami Herald story today.

At the end of 2009, 4.9 percent of all pools of these loans - called commercial mortgage-backed securities - were delinquent. That’s a fivefold increase over the year before, Moody’s Investors Service said in a mid-January special report.

The rating agency’s “delinquency tracker” found that at year’s end, more than 8 percent of the bonds for apartment-complex mortgages and more than 9 percent of the bonds for hotel mortgages were delinquent.

With occupancy rates plunging, several high-profile defaults on pools of hotel loans underscored the risks. These include, according to Moody’s, pools that contained the Four Seasons Resort and Club outside Dallas, the Westin O’Hare near Chicago’s airport and Holiday Inns in Louisville, Ky.

Even New York City isn’t immune. In one of the biggest commercial real-estate deals yet to unravel, an investor group said Monday (Jan. 25) that it had defaulted on the debt used to finance its $5.4 billion purchase in 2006 of the huge Peter Cooper and Stuyvesant Town apartment complex in Manhattan. The 11,000-unit, 56-building property is now valued at less than half its purchase price.

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