California Controller John Chiang's monthly summary of the state's cash situation starts on a happy note. (Found via Calculated Risk.) Unexpectedly, General Fund revenues for October beat budget estimates, mainly because of a boost from corporate taxes.
Chiang, whose monthly missives warning of impending bankruptcy have been a staple of California life for the last year, becomes positively ebullient:
October's numbers may contain some signs that California's economy is gradually beginning to heal. Both personal income and corporate taxes beat monthly estimates, while corporate and sales taxes also came in higher than October 2008.
As California goes, so goes the nation? If we're talking budget paralysis and dysfunctional politics, that might not be a good thing. But if we're talking economic recovery, a return to health out West would be a welcome prospect for the entire country.
However, after lulling our fears with his happy talk, Chiang appends a "guest article": "Overview of the Commercial Property and Capital Markets with Implications for the State of California," by Dr. Randall Zisler.
The message from Dr. Zisler is quite different. Nationally, the commercial real estate market is in big, big trouble.
A crisis of unprecedented proportions is approaching. Of the $3 trillion of outstanding mortgage debt, $1.4 trillion is scheduled to mature in four years. We estimate another $500 billion to $750 billion of unscheduled maturities (i.e., defaults). Unfortunately, traditional lenders of consequence are practically out of the market and massive amounts of maturing debt will not easily find refinancing. Marking-to-market outstanding debt will render many banks, especially regional and community banks, insolvent, especially as much of the debt is likely worth about 50 percent of par, or less.
Stated baldly: Banks are on the hook for loans to commercial real estate developers that will never be paid back and can't be refinanced. Zisler doesn't break down the figures to tell us how much of that $3 trillion in outstanding mortgage debt is California's, but one can guess that it is a significant fraction.
California's faltering steps forward, in terms of rising tax revenue for October, could just be the calm before the commercial real estate storm finally hits. Double-dip recession, with a California topping, anyone?
The economic crash and its aftermath are affecting all sectors of the economy, real estate being no exception. Real estate, especially in the transactional sub-sectors (e.g., brokers, etc.), accounts for a significant share of the California labor force. The downturn has created a vicious negative feedback, a symptom of which is still ongoing property deflation and tenant defaults. Attendant symptoms are reduced property tax revenues, failing businesses, decimated transactions volume, and reduced income and sales tax revenues. The extent to which the recovery is delayed will depend on a number of factors, not least of which is the extent and timing of loss recognition by owners and financial institutions.