ChipSeal

Time to Invest in REITs?

The tri-headed debt monster says commercial real estate (CRE) values are stratospherically high.

First head: Most regional and community banks made Fanny/Freddy loans for origination fees but have few residential loans on their books. So they are over-weighted with CRE loans, many that are in trouble as business suffers, and they MUST repair their balance sheets. Therefore, most of them are unable to lend.

Second head: The deteriorating business environment is making many CREs too risky to lend to. Some are in imminent danger of violating current loan covenants. Warren Buffet is lending- but only if he can get 10-15% in a 4% world.

Third head: Those that are credit worthy to lend to are not yet willing to borrow. With CRE values continuing to plunge and vacancy rate rising, why borrow now when better bargains are ahead?

Keep your powder dry. CRE has two or three more legs to go down. And then it will lag behind the market for years as the tremendous present overcapacity gets drawn down.

6 REITs for a 'Recovery Portfolio'

Many REITs have outstanding debt that they may not be able to re-finance. Some are facing loan covenant problems. Be careful!

Jim is working without debt on his finish-to-rent business plan, a far different business model than REITs.