Is Commercial Real Estate the Next to Decline? 12 comments
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In the last year we have witnessed economic corrections resulting in the folding of a housing market, a credit lockup, a failing financial sector, a recent oil pop, insurance and rating agency scandals, forced redemptions, unseen VIX levels.....etc. etc. etc.
In light of the holiday season, it seems the newest data being watched is that of the retail sector. With knowingly weak and worsening consumer spending numbers, one would be expected to question the stability of an already weakening commercial real estate market.
With dropping sales and corporate restructuring, many stores, restaurants, cafes, etc. are closing up shop. This has already been seen on a wide scale, be it from the cafe downsizing announcement by Starbucks (SBX) or the bankruptcy filings from big-box stores like Linens 'n' Things.
The instability of commercial real estate has already begun its downtrend as commercial vacancies rise dramatically leaving some regions with vacancy rates of 15-20%.
A main danger inherent in commercial real estate is that closing businesses are sometimes 'anchor' stores; those who are a main pulse and attraction of an individual center. Thus the closing of a store in some cases will seal the fate for an entire shopping complex.
It is also common for newer retailers to have 'anchor' clauses built into the lease stating that if a designated 'anchor' store closes then they may choose to terminate their lease as well. This can be an expected multiplier to the down-trending market as it compounds the speed at which retailers vacate the complex.
The National Association of Realtors official CROE report is summarized by saying:
The fundamentals in commercial real estate are feeling the stress of a slowing economy and troubled credit markets. Job growth, particularly in office-using industries, has been declining. Vacancy rates are expected to rise in all sectors due to decreased demand. The financial decline is squeezing credit availability for commercial projects. As a result, transaction activity is down over 50 percent compared with last year.
Chart Source: globaleconomicanalysis.blogspot.com
Disclosure: Frequent positions in SRS, URE, IGR.
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This article has 12 comments:
Commercial will be fine.
On Dec 30 10:27 PM CWest wrote:
> The 'silver lining' - new commercial projects have come to a virtual
> standstill. The is no 'overbuilding' going on looking out 12 months.
> ProLogis, one of the most prolific 'spec' builders on the planet,
> has only custom projects (Fully pre-leased) on the books.
>
> Commercial will be fine.
>
"...About 160,000 stores will have closed this year and 200,000 more
could close next year, said Burt P. Flickinger III, managing director
of consulting firm Strategic Resource Group. That would be the
industry's biggest contraction in 35 years. In March and April of next
year, Flickinger expects 2,000 to 3,000 malls to close."
www.courant.com/news/n...
Or how about this?
"...Even to industry veterans who have lived through other downturns,
the precipitous decline in the Manhattan office market, especially in
Midtown, has been startling.
“We have fallen further faster than any time in the last 20 years,”
said Mitchell S. Steir, chief executive of Studley, a national
brokerage firm that represents tenants. “There has been more damage to real estate values in the last four months than in any other four-
month period. The pace with which it has occurred has been
astonishing.”
www.nytimes.com/2008/1...
Even debt refinancing through TARP can't save the REITS from massive declines in revenue.
That's my biggest play in 2009, along with jan. 2010 puts for homebuilders.
concisetrading.blogspo...
Ryan
On Jan 01 03:45 AM nayr wrote:
> I am getting long srs myself. The compounding leverage works on
> the upside as well as the down.
>
> That's my biggest play in 2009, along with jan. 2010 puts for homebuilders.
>
>
> concisetrading.blogspo...
> Ryan
www.concisetrading.blo.../
Ryan
Not too long ago, investors were jumping into the commercial real estate fast lane, buying up office towers, apartment complexes, hotels, shopping malls and any spec property that promised to reap rewards through escalating values. But now things are not looking so rosy for commercial real estate.
Contractors, investors and developers are facing what could be the worst real estate crisis since the early 1990s. The crisis in the 1990s happened when federal tax breaks led to overinvestment and overbuilding. But the impending crisis is the result of cheap credit, which tempted developers to bid up the prices of existing properties creating a price bubble.
Once again, banks are left holding the bag. In the second quarter of 2008, banks held more than 50% of commercial real estate loans, with smaller, regional lenders having a relatively larger exposure. Regional banks are now waiting for a second wave of loan losses to hit, this time instead of toxic residential debt, it’s shopping centers, hotels and major residential and commercial construction projects. The charge-off rate for these loans is about 1.1% and growing.
The number of overdue commercial construction loans is on the rise, which portends a rise in defaults. In the third quarter of 2008, overdue loans had quadrupled from two years earlier for the same period, according to Federal Reserve data. That’s the highest spike since 1994.
Jeffrey DeBoer, president of the Real Estate Roundtable estimates that about $400 billion worth of commercial real estate mortgages will come due by the end of this year. But since many banks have stopped lending to any new construction projects, developers will have a hard time refinancing the hundreds of billions in loans already on the books.
The Roundtable is part of a real estate affinity group that's leaning on the Federal Reserve and Treasury Department to create a special lending program for the commercial mortgage-backed securities market. No decisions have been made, but Treasury did indicate that extending part of their financial bail-out package to this market sector is within the realm of possibility.
Meanwhile, major construction projects across the country are on hold. From churches where the membership is uncertain about spending funds, to universities that have seen their endowments collapse, to individual developers who aren’t willing to spend money in the current economic mess. Even architectural firms are feeling the pinch as skittish clients cancel large projects.
Even though the downturn in the commercial real estate hasn’t been as dramatic or as headline grabbing as pictures of homeowners sent packing, commercial defaults could deepen and prolong the recession. Moody's Economy.com estimates that commercial real estate losses could slice about $30 billion from our economic growth this year.
Many in the construction industry are pushing Congress to approve President-elect Obama's proposed stimulus plan to revive the economy and pour hundreds of billions of dollars into rebuilding the infrastructure. It could be enough to keep developers, construction workers, architects, engineers, heavy equipment manufactures and staff members employed and supplied with spending cash until the economy recovers.
But will Obama’s plan succeed in reviving the economy and boosting consumer confidence? Will he make good on his promise to spend those funds on rebuilding the country’s infrastructure? Will he even mange to get the necessary funds in the face of growing skepticism over missing money that banks received in the first stage of the bailout package? If things go according to plan, construction firms might be able to turn their attention to public works projects like bridges, roads and schools. When you consider the huge budget shortfalls of many states and municipalities, there appears to be a sizable backlog of projects in need of funding.
This comment was posted by Jose Roncal, co-author of "The Big Gamble: Are You Investing or Speculating?" - For more information, visit financialspeculation.c...