We Have Way Too Much Commercial Real Estate

CREamated!

I have spoken here often on how commercial real estate ("CRE") follows residential in falling off the cliff and how lately it has really, really been taking a dive. I thank Calculated Risk for educating me in this respect. We have way, way too much CRE, including hotels, retail space, office space and the like. AND I MEAN WAY TOO MUCH!! We have twice the retail space per person as any other country and most have a fraction - a small fraction - of what we have. And for the government to now be acknowledging that CRE may be a problem is, well, a vast understatement. We will see.

Pinching the Pensioners

I have read a good bit on pension problems, and I mean major problems. I am part of the 401(k) crowd, so pension talk does not normally peak my interest, but it has so infected what I am reading that you cannot ignore it. There are still a lot of people near or in retirement these days dependent on pensions to retire that it is a major issue, especially for baby Boomers. A lot of these are government workers and, seemingly, a lot live in California - an area particularly hard hit this time around. It would appear that the California Public Employees Retirement System (Calpers) is in need of an infusion, which means current employees will undoubtedly need to increase contributions and reduce eventual benefits. In short, they have both short and long term pain ahead.

This is one of many reasons why I think - while we may be reaching a bottom - we will be bottom feeding for years to come. I do not see a bounce, just stabilization, in our future for years to come.

By the way, pension pulse has a lot of good pieces on our pension problems. The are many and far spread.

Real Estate Stabilizing but Foreclosures - Not Yet

Apparently foreclosure activity, at least in CA, is not at peak yet and may pick up in the third quarter. Prices seem near a bottom but loan defaults, especially on higher priced real estate, seem to still be on the increase and banks are finally taking action on these homes. There was some talk that banks were holding foreclosed homes off the market because conditions were so horrendous. We will see where this leads.

Disclosures: None.

Comments

[Joseph L. Shaefer]

...and not just too much commercial real estate, Johnny! If it were all paid for, it could lie fallow for a year or more and still squeak through. But on top of this surfeit of real estate, there is also a surfeit of DEBT. Obligations that must be paid monthly, qurterly or semi-annually for buildings that lie unrented for a year or more do not bode well for lender or lendee.

2009 Jul 23 04:28 PM

[yellowhoard]

The only way that we will not see a collapse in CRE is if Feds declare a bank holiday and cut the value of the dollar in half or more.

I'm not rooting for it, but it would bail out a lot of people with large amounts of debt.

2009 Jul 23 04:55 PM

[doubleguns]

To many stores/outlets not enough business. Consolidation will just add to the amount of CRE for lease/sale not to mention the ones that are not going to make it. This christmas season will be interesting, I would expect a lot to try to hang on till then and if business does not pick up then it will be game over.

2009 Jul 23 06:03 PM

[Mad Hedge Fund Trader]

The industry is choking on the stuff. If you have had any doubt that commercial real estate is not the place to be putting your capital right now, take a look at the latest Q2 industry data. The vacancy rate jumped from 19.9% to 21.4%. Net negative absorption nearly doubled from 600,000 sq. ft. to 1 million sq. ft., while 723,896 in new space was completed. Closed sales plummeted from $87.2 million, to $45.9 million. Paying tenants looking to add space are staying away from the market in droves, easily renegotiating reductions in lease rates instead of committing to risky new purchases. The inventory glut is dragging prices down, scaring off marginal lenders. Several high profile bankruptcies of trophy properties have only exacerbated the pain. The capital drought looks likes it will get worse before it gets better. I would love to recommend shorts here, but the listed REIT’s have already been so crushed, I’d rather stay away. Look at the chart for Prologis (PLD). Pilots will recognize all of this as an irrecoverable flat spin, a twin pilot’s worst nightmare. Non-pilots should watch Top Gun.

2009 Jul 23 06:30 PM

[Moon Kil Woong]

Apparently, this can last forever with new accounting that exempts banks from having to mark their assets to real values anymore. Thus it will last as long as it takes them to clear them off the market. For japan it took around 20+ years.

2009 Jul 24 01:31 AM

[MichaelJ007]

CRE is in for a loooong painful downfall and even longer recovery. We got so overbuilt, overvalued and overleveraged it's gonna take a decade or longer for supply to actually meet demand.

2009 Jul 24 10:37 AM

[notsosmart]

we have too much of everything.too much stuff & too much debt.

2009 Jul 24 12:59 PM