Random Walk Down What Is Definitely Not Wall Street

When I did the first of my Random Walk series, I focused exclusively on the empty storefronts in Manhattan's Madison Avenue Gold Coast area. It was enlightening to many to see just how deep into the heart of the monster the CRE collapse had cut.

However, unless you look at the commercial real estate apocalypse unraveling in Central and Eastern Europe you ain't seen nothing yet. Whereas here if you have some spare cash you can buy 400, maybe 500 sq feet of prime commercial real estate in which to sell, uh, sodium hydroxide and lye, if you head east you really hit the jackpot. The problem is truly pervasive across all the countries I visited, but surprisingly nowhere is it as acute as in the EU's most recent (and corrupt) member state, Bulgaria.

After a 10 minute rambling trip I saw an astounding amount of brand new, glass walled, hyper modern office towers. Office, after office, after mall, after office, after car park, after office... Complete and total overcapacity meltdown. Nobody wants to touch these even with a Morgan Stanley AAA RE-REMIC. And the funniest thing is that between Raiffeisen (RAIFF.PK) and UniCredit (UNCIF.PK), builders of these very offices in 2007 were getting practically free credit at 100% LTV from the Austrian and Italian banks. To get a true sense of how bad it is, take the picture below and multiply by 100x for CRE and by 1,000x for Residential Real Estate, and that's just Bulgaria.

But ignore this house of cards: who cares if all these buildings are generating exactly zero cash... who cares if the problem is endemic to all of Europe - Zero Hedge's old friend Steve Sakwa took the opportunity yesterday to issue a report for ISI in which he praised REITs and was very positive on the sector overall (Zero Hedge will gladly dissect Sakwa's report tomorrow).Overcapacity? The word is banned from the lexicon of all current and former Merrill Lynch employees.

In the meantime, enjoy these pictures of pretty, if completely vacant, office buildings.

Comments

[john s. gordon:]

speculative building run amok, not unique to u.s homebuilders. shows you what excess liquidity can do.
> jack.

Jul 14 08:26 AM

[MichaelJ007:]

That's def some Class A space. I'm sure the rents were underwritten well above market. Another straw on the camel's back is not only the vacancies but also all of the struggling retail, office, industrial and flex space users that are stuck in leases that were inked at the top of the market. Plenty of CRE properties will be faced with the choice of renegotiating lease terms or tenants vacating/going dark.

Jul 14 08:28 AM

[John Galt:]

Yet these REIT managers all say the same thing, "it's priced in". While most people see the commercial real estate market as the next leg to fall... The REIT managers won't deny that, they just say the market already priced it in. That's what they said before, that's what they say now, and that's what they will say later on when it's still a mess and the non-investing public really gets it.

If you say something won't get worse, you can easily be proved wrong once it does get worse, but if you say, yes, you are right, it will get worse but the market is pricing it wrong... then you can always go back and argue price " the market overshot it or under shot it".

Your Random Walk confirms the common sense.

Jul 14 08:29 AM

[swaps:]

Nice description of the incredible problem. But you failed to suggest the solution.
First, flood Bulgaria and Europe with cheap foreign labor from Mexico and India.
And then hire hit squads to eliminate anyone who opposes "free" trade as opposed to trade you pay for. And we have paid heavily long term in the U. S. for short term free trade. Go look for the paid provocateurs who disrupted the world trade meeting in Seattle for staffing the enforcement squads..
Then turn to Karl Marx and nationalize the banks, especially the ones that are still solvent and thus a threat to the bankrupt money center banks.
Finally, raise the white flag and surrender to the international communist Trotskyites and bow before the world control center that will with armed force oversee their dream nightmare world.
All those empty buildings can be used for garrisons for the troops.
A standing army on evey corner, the modern way to do a WPA project because the world has now already been built. In fact, I remember the Ro bert Reagan crowd explaining the smaller economic collapse back then was because the nation has been built and many people were surplus. But Reagan was ignored and developers borrowed heavily after that to overbuild the nation, using the huge influx of immigrants as a catalyst.
I had not realized how far down the same road Europe has gone.
Europe turned to the same strategy, importing hordes of immigrants after telling their own women to have only two children because resources were in short supply and had to be conserved..
Thanks for telling us how global the grimness is..
And proving that excessive growth does not pay for itself.

Jul 14 10:03 AM

[stockferret:]

Bleck. Don't they teach anything but modernism in architecture school anymore?

Jul 14 10:16 AM

[LIVE FREE O...:]

I understand the same thing is happening in China but they are still building. Many of the completed office buildings, etc., from 2007 to present, are vacant but they continue to build. Because of the rising unemployment and social unrest, the government dare not stop new construction or the overall situation will truly continue to deteriorate. At least they have all these extra dollars they can put to work.

Although we hear about some rioting and deaths in China, the reporting doesn't come close to how bad the situation really is over there.

Jul 14 10:47 AM

[onebir:]

"I understand the same thing is happening in China but they are still building. "
Not sure about offices, but there are plenty of half-finished residential blocks standing empty, with little or no sign of construction activity. Significant chunks of completed residential blocks have been sold as investments and stand empty. (This is in a provincial capital way inland from the worst effects of the initial boom, & the exports slump, but probably not on the receiving end of too much stimulus.)

Jul 14 10:55 AM

[AndrewBaker:]

If people realized that there is a commercial property crash happening right now in the US then maybe they would be a little more aware of the real financial downturn we are in and likely to remain in for a long time to come.

Market manipulation, particularly of the banks and financials, appears not only to have raised stock prices far too high but also seems to have persuaded some that there is a recovery coming. What recovery? Where are the figures, statistics, or numbers that show this?

The best thing about the current market is that you've got a chance to sell at a reasonable price: don't miss it. Sell now, banks first.

Jul 14 11:57 AM

[dybydx:]

LIVE FREE,

so tell us more exactly how bad the situation is over there :p

we just built 2 small apartments in Guandong this yr and banking for some decent windfall in the next few yrs.

we're not concerned about renting though. as u said there is a large influx of workers into the city. they cant afford buying a home in this economy, so renting is their only reasonable option right now.

we financed construction with 100% cash.

Jul 14 12:01 PM

[LIVE FREE O...:]

The real estate bubble is building. Like you said, financing is cheap and construction is ongoing. There is tremendous discontent among the population (unemployment, government corruption, discontent among the minority population, etc.).

1. Thousands of factories have closed in the last 2 years (unemployment continues to rise), be careful about government stats. If government were not involved, business would be contracting.
2. Discontent use to be in the rural areas (political corruption, government seizing property proprty, etc.). Now discontent is spreading to the larger cities. As unemployment and inflation continue to increase, so will the discontent (check out youtube for some of the recent riots).
3. The U.S. media (and the Chinese government) have done a good job selling the world on the Chinese economic rebound. There is no economic rebound. Commodities and all other purchases in the past 3 - 4 months were made with a tremendous dollar surplus. It had nothing to do with economic expansion.

Unfortunately for the U.S., the Chinese government at least appears to be more capitalistic than the U.S. I don't doubt the as we come out of the recession, China not the U.S., will be leading the way.

With our current economic problems, and a government hip deep in the middle of redistributing wealth, we have years before there will be light at the end of the tunnel.


On Jul 14 12:01 PM dybydx wrote:

> LIVE FREE,
>
> so tell us more exactly how bad the situation is over there :p<br/>
>
> we just built 2 small apartments in Guandong this yr and banking
> for some decent windfall in the next few yrs.
>
> we're not concerned about renting though. as u said there is a large
> influx of workers into the city. they cant afford buying a home in
> this economy, so renting is their only reasonable option right now.
>
>
> we financed construction with 100% cash.

Jul 14 01:24 PM

[seekingnorm...:]

Heh heh. Thailand circa 1998 through 2005. The difference this time is we'll get help from ... umm ... outer space? The world's been through this before and every time vested interests (one more run and this time I'll stash all the money in a tin can under my mattress ...) will rely on the good old "caveat emptor" to assuage their conscience. Hmm ... didn't the roman empire decline because of lead poisoning?

Jul 14 01:41 PM

[seekingnorm...:]

Ha ha - natural reaction to the uncertain times. This webpage is cathartic. Incidentally, do you think there'll be an oversupply of peanuts?

On Jul 14 01:46 PM handoverfist. wrote:

> you people are all nuts

Jul 14 01:56 PM

[montyman:]

Yes these problems are real, but my best source tells me that REITS will still do well (at least for a while yet). How? I didn't understand his explanation, but hasn't there always been some last minute rescue with things like this? And yes Tyler Durden "followers" (as they should be called) are indeed fools. When was the last time you made money shorting on Tyler's information???

Jul 14 02:48 PM

[Rollerball:]

Short window cleaners.


On Jul 14 02:48 PM montyman wrote:

> Yes these problems are real, but my best source tells me that REITS
> will still do well (at least for a while yet). How? I didn't understand
> his explanation, but hasn't there always been some last minute rescue
> with things like this? And yes Tyler Durden "followers" (as they
> should be called) are indeed fools. When was the last time you made
> money shorting on Tyler's information???

Jul 14 03:24 PM

[Rokjok777:]

Kudos to you Tyler for actually getting out in the world to see what is actually going on. Capital has been mis-allocated, bigtime. That will correct, in fact it's already begun. I think we're in the second inning....

Jul 14 03:39 PM

[conceptwizard:]

It will be nice to have all these brand new buildings available to house the homeless, jobless Americans. Its a shame these darn buildings are kept emplty with all the tent cities popping up everywhere you'd think they'd chuck the keys to a parish priest to house people in. Just another waste, use the taxpaing money to bail out the banks that own the building and they let it sit empty. Why not make a homeless shelter out of them with community kitchens in the basements.

But that would take creative thinking that I am quite sure they are not capable of.

Jul 14 09:18 PM

[Mark Bern:]

CRE crisis is just getting started in the US. Layoffs, bankruptcies, cost cutting, and reduced consumer spending all lead to increased vacancies in offices and retail space, not to mention industrial space. We'll be seeing the effects of all four over the next couple of years. And then there is the tight credit market for refinancing debt, especially for real estate.

Well, the pundits tell us that growth is strengthening overseas, especiall in China. China is supposed to pull the whole world out of recession. At least 20% of China's GDP is derived from exports. If exports are down by 25% (just look at the last couple of quarters of trade results) then that reduces total GDP by 5%(.25 x .20 = 5%). If domestic growth increases by 10% it wll add only 8% to total GDP (.10 x .8 = 8%). Combine the two and you get a net growth rate of only 2%.

So, for China to attain a net 6% growth rate for GDP it would require more like close to 14% domestic growth (.14 x .8 = .112 - .05 = 6.2%). Forced growth, building infrastructure, make work projects and the like only create temporary jobs and cannot be sustained. The China miracle could fail if they start to run out of hard currency. The surpluses are dwindling, not building, because of the stimulus being pumped into the domestic economy in China.

The flip side is that just how much of the "whole world" can a China pull out of recession without increased demand from American consumers? They continue to build capacity (that will remain underutilized) for the future when America comes out of its recession and consumers start buying like there is no tomorrow again. Well, they've got a much longer wait than they expect, IMO. They are building their houses on sand. We are the foundation and we are in no condition to support their continued expansion.

And then there is Europe, in worse shape that the US, especially in the real estate market. When we talk about how bad things are in Eastern Europe, we tend to forget that it was banks in Western Europe that financed the overbuilding. The pain will be felt all across the continent. Then European unemployment will continue to increase well beyond expectations and consumption will not rebound there either.

Let's see, from a consuming standpoint that doesn't leave much; Japan, maybe. Well, Japan has major problems of their own and they are not well known for being able to stimulate much of anything (remember the lost decade?).

So, in summary: a huge CRE default combined with tightened credit, rising unemployment worldwide, 30 - 40% loss of wealth for the majority of consumers worldwide, rising bankruptcies, government takeover of private industries, social unrest is just starting to simmer. These, my friends, are not green shoots.

Jul 14 11:43 PM

[Vienna:]

One fool tells you that you are all fools. Typical answer from a dumb american (I suppose)

but hasn't there always been some last minute rescue

Dumbo, you don't rely on last minute rescues, you try to avoid them and prey that when it get hairy that it might work out, but you don't rely on it. That is what you are doing with Oil as well, dumbo, sit down and think before insulting other people.

Great, I am starting to us typical US articulation in my sentences.

On Jul 14 02:48 PM montyman wrote:

> Yes these problems are real, but my best source tells me that REITS
> will still do well (at least for a while yet). How? I didn't understand
> his explanation, but hasn't there always been some last minute rescue
> with things like this? And yes Tyler Durden "followers" (as they
> should be called) are indeed fools. When was the last time you made
> money shorting on Tyler's information???

Jul 15 04:21 AM

[Vienna:]

Well we have all learned that the americans are very capable of creative thinking.


On Jul 14 09:18 PM conceptwizard wrote:

> It will be nice to have all these brand new buildings available to
> house the homeless, jobless Americans. Its a shame these darn buildings
> are kept emplty with all the tent cities popping up everywhere you'd
> think they'd chuck the keys to a parish priest to house people in.
> Just another waste, use the taxpaing money to bail out the banks
> that own the building and they let it sit empty. Why not make a homeless
> shelter out of them with community kitchens in the basements.
>
> But that would take creative thinking that I am quite sure they are
> not capable of.

Jul 15 04:27 AM

[BPYHO:]

Have you been to an Eastern European country before? Take a stroll down any of former Soviet countries bigger cities and they're teaming with 'historical' buildings. It's practically all they have so the designers of newer buildings go for the modern look.


On Jul 14 10:16 AM stockferret wrote:

> Bleck. Don't they teach anything but modernism in architecture school
> anymore?

Jul 15 08:10 AM