Is Commercial Real Estate the Next to Decline?

Includes: IGR, SRS, URE
by: Walid Nasserdeen

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 (NYSE: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.

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Disclosure: Frequent positions in SRS, URE, IGR.