Commercial Real Estate Squeeze Is On

It’s a complete buyer’s market.

- Brian Rance (subscription required), US Managing Partner, Freshfields Bruckhaus Deringer, a law firm

According to a Wall Street Journal article (subscription required) today, a record 8.9 million square feet of high quality, class “A” office space is available for sublet in midtown Manhattan. In Greenwich, Connecticut, hedge fund land, financial firms have put 380,000 square feet up for sublet - about 10% of all the mid and high end commercial space in town. The asking rents are well below what the firms locked in years ago during the boom.

Remember: Commercial real estate is next (see, for example, “The Other Shoe” (subscription required - e-mail me for a link), Barron’s Cover Story, May 4 2009).

Comments

[ain't no fo...:]

There's been a lot of denial on the part of the markets about the potential impact CRE will have on this economy, especially since the worst of the defaults and inability of companies to roll over their debt is thought to be a year or two off - evidently, people hope that a recovery in the economy before then will reduce or eliminate its severity.

Hope is not the best investment thesis.

It appears that the denial is diminishing as the news turns more bleak... and it could be that we have an overlapping period of time starting late 2009 into 2011 where the Option Arm/Alt-A meltdown and CRE collapse co-exist.

That would not be good - and today's unemployment figures don't exactly encourage happier scenarios.

Jul 02 09:31 AM

[TeresaE:]

Duh.

Banks are yanking loans away from paying commercial customers (while the news focuses on the raising of interest rates & fees on consumers) and NO ONE KNOWS ABOUT IT.

The CRE market is tanking because small businesses are being forced into bankruptcy by the banks, the government and foreign competition.

Even the pundits who see that the CRE destruction is starting, miss the most obvious effect of this destruction.

These empty buildings, offices and factories represent lost CUSTOMERS.

Layoffs represent lost CUSTOMERS.

Higher taxes, unless you are in a gifted business, represent lost CUSTOMERS.

And in a consumer, materialistic driven society, this greatly diminishes any chance of "recovery" for the bulk of our country.

Jul 02 11:14 AM

[Mad Hedge F...:]

Janet Yellen certainly thnks so. Commercial real estate is at the top of her worry list, as falling rents and capital values could create a downward spiral, further impairing the banks. Brace yourself.

Jul 02 11:25 AM

[KIT:]

There is one more overlap Canada lags US recessions by one year so our primary wave will hit right on top of your wave 2.


On Jul 02 02:36 PM WAKEUP wrote:

> "...an overlapping period of time starting late 2009 into 2011 where
> the Option Arm/Alt-A meltdown and CRE collapse co-exist." EXACTLY
> SO. Then, add: "...and today's unemployment figures don't exactly
> encourage happier scenarios", and you have the devil's brew that
> we are about to have to drink. It's interesting to note that while
> these things will all have to be ENDURED, together, almost no writer
> or politician MENTIONS the multiple-whammy, together. That's the
> type of "Let's don't talk about it" mentality that allowed things
> to ice-skate to where they are, today.

Jul 03 10:14 PM

[fleeing omega:]

Speaking of overlap, there is also the not insignificant issue of China, where a stimulus-maintained GMP appears to be priced in. Not everyone believes that China, despite its obvious recent strength, is in a postion to pull the world economy out of this tar pit on its own. Their stock market is back on a tear, and that would appear to be stimulus driven and a bit ahead of schedule. Not sure when it will come to earth, but the time frame mentioned is not out of the question. In the recent past it has been Wall Street that set the trend. But with all eyes on China now, what will that correction do to world financial markets ?

Meanwhile, it sounds like China is avoiding long bonds and looking into other currencies and even a spot of gold. So what I am leading up to here is that the shoes might really start dropping left and right. You know that employment is in bad shape if you talk to other human beings, and ARMs and CRE are going down in flames, because they have to. Green shoots market looks set to fade away, but what if the dollar and treasury bond auctions also do poorly? At the same time! Sounds unlikely, but ask yourself this: is the financial system doing well, or is there a serious problem?
This possibility is very concerning to me.
I realize the Fed will snarf treasuries up like pig chow if demand fails but how much more monkey business with the financial system and fiat money system tolerate before people the world over get that look on their faces, drop what their doing and run for the exits again? And if that happens, what exactly is going to reassure them now that the koolaid has all be poured?

Well, enough D & G, time to go have a hot dog.

Jul 04 06:07 PM

[Moon Kil Woong:]

The pertinent question is how long can developers and others hold out before they have to start dumping their commercial properties? For banks it seems like it's forever since they just go beg the Fed or treasury for a backstop or to buy commercial bond paper outright at a hefty premium.

Even when Donald Trump went bankrupt (before he was recapitalized by billions from his dad's passing away) it took years to pry his bankrupt properties out of his hands and get them sold on the market. The fall in commercial property is by nature a slow, semi-transparent occurence usually heavily subsidized occurance. The banks want to keep loaning to developers (to stop shows that all their developers are broke making them bankrupt). The government doesn't want to accept that their economy is fundamentally rotten along with many politician's campaign contributors (thus must find creative ways to fund their bonds so they don't have to sell at a loss or buy them outright). And developers and comercial realtors lant people to lease and not sell so no one has to revalue pricing in an area. The fact that commercial realtors and developers are a tight network akin to an oligopoly only helps even more in obscuring real commercial property values. The US needs to do something forcing people to publically disclose all area real estate information so that property information is more quickly digested and valued among a wide variety of interested parties and not used as asymmetric information for real estate brokers and developers to fix prices or rip people off on both ends of the bargaining table.

We really need real reform in this area. The fact no one speaks about it shows how much more real estate interests are entrenched than the public interest.

Jul 04 10:44 PM