CMBX Spreads

CMBX spreads have softened slightly on the back of the Federal Reserve's decision to purchase $600 billion of asset backed securities from Fannie and Freddie which essentially gives the two GSE's a little bit of breathing room.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ai_aErzotzx8&refer=home

Conforming 30-year fixed mortgage rates responded immediately by dropping almost 50bps. CMBX rates have also declined slightly across the board.

But perhaps the move was largest on the REIT side, where ultra short real-estate ETFs such as SRS collapsed from a high of $295 to $131 a whopping 55% move in just 3 days.

For those that think the worst is over, as I always say increases in amplitude and frequency usually indicate imminent system failure. CMBX spreads are still at all-time highs, the economy is faltering, and builder are still building...

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Here's a great commercial real estate search for the Southern California area.

This site focuses on Industrial Warehouse properties, mostly on the smaller side (less than 15,000 sqft). It has a unique user interface and pictures that are much better than typically seen on the MLS.

Warehouses / Industrial Properties for Lease in Torrance California

http://www.orealo.com/wsp/city_details.php?n=2&c=Torrance

Warehouses / Industrial Properties for Lease in Burbank California

http://www.orealo.com/wsp/city_details.php?n=2&c=Burbank

Warehouses / Industrial Properties for Sale in Rancho Cucamonga

http://www.orealo.com/wsp/city_details.php?c=Rancho+Cucamonga

-GH

The biggest bets in Las Vegas

Real estate developers such as MGM-Dubai, Las Vegas Sands, Boyd Gaming, and Wynn are engaged in some of the biggest bets in Las Vegas.

Today the Las Vegas skyline looks like Shanghai 2005 as dozens of new hotels, corporate centers, and luxury condos are currently under construction - a shocking site as the US slides into the most severe recession it has seen in decades.

Leading this construction is the MGM-Dubai $11 billion "City center" project.

CITY CENTER LAS VEGAS UNDER CONSTRUCTION

This massive 72 acre, 18,670,000 sqft project is the largest construction project in the United States. Scheduled for completion in 2009, the city center will contain over 7000 suites and condos.

Another monster project under construction is the Cosmopolitan Resort Casino, a $3 billion 6,900,000sqft project containing rooms and studio condos. These studio condos are "projected" to sell for $559k to $1.2 million.

The larger project is the Echelon hotel project being developed by Boyd gaming. This $5 billion project is a 1,890,000sqft project, featuring 5300 rooms and a convention center.

Fontainebleau Las Vegas is being built north of the Riviera hotel, with 3889 rooms, 850,000sqft, and at a cost of $3 billion.

Additions

Not to be outdone, the existing hotels are all adding to their properties.

Donald Trump well known for his beautiful hair, is doubling down and adding a duplicate 1282 hotel tower to match his existing 1,500,000 sqft $600 million hotel. However in the planning process he somehow forgot to add a casino in his property.

Not to be outdone, Wynn well known for his belligerence is adding a new "Encore" wing at the Wynn. This project with 2032 rooms, 1,500,00 sqft, will cost $2.1 billion and be built on the existing golf course of the Wynn.

And of course Caesars has decided to add a $1 billion dollar, 263,000 sqft, 665 room addition to their property.

This doesn't even include the massive amount of office building, off-strip luxury condos, shopping centers, and other projects being built in Las Vegas.

SO WTF?

WTF is a very fair reaction to this construction. In 2007 Vegas contained about 132,947 rooms. The existing construction (including 2008 completed projects such as the Palazzo) will add a whopping 42,000 rooms to this number, increasing a 32% increase!

During the roaring 2005's this might have been workable, with US consumers HELOCing hundreds of thousands of play dollars out of their houses and mortgage brokers pocketing $50,000 kickbacks. However one has to seriously question whether Las Vegas will simply implode under the weight of this additional occupancy. MGM, Las Vegas Sands, and other operators are already in trouble. Vacancy is up, occupancy revenue is down, casino revenue is down (not that it matter's for Trump how doesn't have a casino), and all other entertainment revenues are down. Las Vegas Sands already posted a Q3 loss of $32 million, and MGM and the rest of the operators are all teetering on the edge.

With over $40 billion of existing projects, many projects not yet completed, the US economy in recession, the ability for these debt-laden operators to service their existing debt seriously comes into question.

The best bet on the strip right now might be to take a short position on these operators (except they are so beaten down already).

-GH

CMBX Spreads - Blowing out or bear raid?

If anyone has taken a gander at the CMBX spreads these days, one will be shocked to note that CMBX spreads have skyrocketed in the last two weeks. AAA CMBX is yielding 700bps, AA 2300bps, and BBB 3750bps. CMBX's are essentially credit default swaps referencing certain Commercial Mortgage Backed Securities (CMBS). CMBS are essentially various commercial mortgages collateralized into a security. You can consider CMBX's tradable insurance against default of the underlying CMBS, and the yield the cost of that insurance. So to insure AAA CMBS costs 7%, AA 23%, and BBB a whopping 37.5%. A credit default swap of 3750bps is indication of imminent failure - Washington Mutual and Indymac debt was trading at similar levels right before they failed.

SO IS CMBS FAILURE IMMINENT?????

The CMBX spreads seem to say so. But not so fast - this brings back memories of the bear raids against the commercial and investment banks not so long ago. How does this work? Essentially hedge funds can coordinate to bid up the price of the CMBX spreads by offering ever higher bids while at the same time shorting the stock of the holders of this debt (or just commercial REITS in general). By successfully driving up the price of the CMBX, the hedge funds create the illusion of imminent failure, which causes the stock price of the CMBS holders to plummet. And of course these hedge funds will have large short positions in these stocks, which means big profits for the funds.
So while the popular media is focusing on CMBX spreads blowing out - the situation itself may not necessarily be that dire.

-GH