Posted on 11/01/2009 4:09:19 PM PST by blam
Soros, Ross: Commercial Real-Estate Crash Is Coming And It's Going To Be Terrific
Henry Blodget
Nov. 1, 2009, 8:35 AM
The commercial real-estate crash is the worst-kept secret in the economy, but it's happening. It's just taking a long time to play out. (Except in the hotel industry, which essentially has "one-day leases").
Wilbur Ross and George Soros were freaking out about it on Friday:
John Gittelsohn and Thomas R. Keene, Bloomberg: Billionaire investor Wilbur L. Ross Jr., said today the U.S. is in the beginning of a “huge crash in commercial real estate.”
“All of the components of real estate value are going in the wrong direction simultaneously,” said Ross, one of nine money managers participating in a government program to remove toxic assets from bank balance sheets. “Occupancy rates are going down. Rent rates are going down and the capitalization rate -- the return that investors are demanding to buy a property -- are going up.”
U.S. commercial property sales are forecast to fall to the lowest in almost two decades as the industry endures its worst slump since the savings and loan crisis of the early 1990s, according to property research firm Real Capital Analytics Inc. The Moody’s/REAL Commercial Property Price Indices already have fallen almost 41 percent since October 2007, Moody’s Investors Service said Oct. 19.
[snip]
(Excerpt) Read more at businessinsider.com ...
This sounds like a good time to go bargain hunting.
And CIT filed today. They are a huge lender to small/medium business. Cash is king for the next few weeks. I think we are in for a big jolt.
To date: 115 bank failures.
Well this ought to help out NY city. Tax those declining values blood suckers!
Exactly what I was thinking. Hubby and I are re-opening his restaurant when he gets back from AF.
Henry Blodget
Nov. 1, 2009, 8:17 AM
Earlier this year, federal regulators relaxed the "mark-to-market" accounting rules that forced banks to tell the truth about what their assets were worth.
This allowed banks to pretend that assets were worth, say, 90 cents on the dollar when their market value was closer to 50 cents. This makes the banking system seem much healthier than it is (look, ma, no writeoffs!). But because the market value of the assets is 50 cents for a reason, the change has likely just prolonged the agony. Instead of banks that would have been fixed rapidly, if painfully, by marking to market, we've got zombie banks.
And, now, regulators have essentially done the same thing for commercial real estate loans.
The commercial real-estate crisis is taking a while to play out, and the new rules will ensure that it takes even longer. Instead of having to foreclose and take writeoffs, the new rules encourage banks to modify existing commercial real-estate loans, even when the value of the asset has fallen below the value of the loan.
[snip]
Does a bear do it in the tall timber?
Trying to catch a falling knife can be dangerous to your financial health. Wait for the wounded to be finished off.
I don’t believe you.
Okay. I don't mind.
Yeah...as the stock indexes climb 5%. DOW up +100 this week on this news.
I just bookmarked this post. Guess why...
i am in the cre busines.
there is tremendous over-capacity in all sectors.
there are no bargains if there are no tenants.
Put down the bong and read the news.
The DOW lost 250 points this past week.
I am amazed at how many unoccupied strip malls are in my area. And those that were at capacity, or close, are now losing tenants almost weekly.
your image with Soros popping out is quite appropriate....since he is such a joker
The hotel industry may have “one day leases”, but the flow of those leases is heavily dependent on business travellers. When the rest of commercial real estate goes belly up, it will be because the businesses that have been leasing it are shrinking and closing, and the hotel industry’s supply of one day leases will dry up at the same time.
I don’t really get why the small retail portion of the commercial real estate world doesn’t get more creative about filling up empty storefronts with nominal rent-payers (like $1 a month) who will commit to keeping some sort of business or other people-attracting activity open for a certain minimum number of hours a week. Once a few stores shut down in these areas, it’s like a domino effect — the area looks shut down, so people don’t even stop for the businesses that are open. There must be people out there with ideas for traffic-generating activities that could occupy a storefront, even though they’d never be able to afford to pay rent.
Seems to me the property owners would be better off with stuff like some little old church ladies who display their quilts and knitted items for sale (even if they only sell one or two a month) and whose friends come by to chat and quilt and knit a lot, than a row of empty storefronts with “For Lease” signs in the window. Stick a “For Lease” sign at the parking lot entrance, but don’t wallpaper the storefronts with them.
Landlords are greedy. The would rather their space stays vacant rather than come down on the price. It is crazy.
Totally agree. We’ve been looking for a good commercial investment for a couple of years. Prices are low, but empty buildings don’t pay the mortgage.
The market value is reported is US Dollars. Adjust it for a currency that isn't dropping in value. Using that reference, the market isn't doing well at all.
"Your Name Here" seems to be expanding.
-ccm
About this time last year I was hearing rumors about a local mall in Pocatello. There were so many vacant stores that the property owners were expected to default on an upcoming payment. That kind of rumor does little to assuage the concerns of existing tenants...or attract new ones.
Unfortunately, I’m afraid this crash IS about to happen, as anyone who has been to central/south Florida can tell you. Lots of finished construction and not many tenants. And this is the dirty secret the administration has been hiding from us. When the FDIC is broke, raising ins. rates and borrowing as they are now, and the excrement hits the fan in the commercial real estate market, the few remaining banks are going pucker factor 10 and there won’t be any loaning going on ‘till the hyperinflation kicks in and interest rates hit new highs. Factor in a rise in taxes and people clutching their wallets tight and we have a big “O”llercoaster coming.
Anti-bubba responds by engaging in a little empty-headed, knee-jerk stupidity that makes him/her feel so self-righteous and better than those "greedy" people who risk investments and actually want to see a profitable return --(how gauche!): "Landlords are greedy. The would rather their space stays vacant rather than come down on the price. It is crazy." (No, Bubba, you're the crazy one if you think any sensible businessman would rather go broke altogether than "suffer" lower rents).
Have either of you ever operated a small business? Had employees? Dealt with local, state, and national regulations governing your business? I haven't, but I've sure been pretty close to people who have and I am also self-employed. I can tell you that those storefronts would fill immediately with prosperous businesses if government would get out of the way and stop stifling them, strangling them, killing them, making any attempt to run a business an insane ulcer-begetting exercise in futility to deal with the regulation and bureaucracy.
Bubba, STOP with the "greedy" crap. It's a cheap, lazy, and ignorant dodge for ignorant people who've never gone out on their own.
The huge over financed buildings will fall into bankruptcy.
There is not enough credit capacity to refinance them anyway.
There will be huge bargains for those with cash.
Watch theNew York City market. That is where the deluge starts.
Hospitality is in trouble because of over capacity, particularly in higher end venues (Vegas) and over leveraging.
No Asshole, I have seen landlords sit on empty space for years and not lower rents. They hope it will get better, but it doesn’t.
Is Helen Reddy?
Finny: I can tell you that those storefronts would fill immediately with prosperous businesses if government would get out of the way and stop stifling them, strangling them, killing them, making any attempt to run a business an insane ulcer-begetting exercise in futility to deal with the regulation and bureaucracy.
Actually, that's not true.
Our demographic situation is so catastrophic that, in another 15 or 20 years, much [if not most] of the [former] USA will look like The Fabulous Ruins of Detroit.
I would say more, but I don't want to get banned.
mynameisjohngalt is closest to the truth when he says, "there are no bargains if there are no tenants".
We literally do not have the population coming along which has a high enough IQ to do the basic business bookkeeping that an enterprise needs just to function on a day-to-day basis [balancing AP & AR, paying the utilities, paying the rent, showing up on time & sober, etc etc etc].
This and this represent the future for huge swaths of the USA.
Read macfromcleveland's comments about returning to his boyhood home in Cleveland recently - it will break your heart and give you an insight into what is coming soon to a neighborhood near you.
The following generations are way too small and poor to replace Baby Boom spending. So, our over-capacity in commerical real estate is here to stay as this new generation maintains a simpler lifestyle with less spending on status and fun and more focus on digital...
It ain't coming back at 1990/2000 levels...
bookmark
That is exactly what happened in New England when real estate tanked in '89 and Bank of New England went under.
The two Wang towers out on I-495 went at auction for $500,000. The high bidders were some young real estate kids who worked for John Hancock. They quit their jobs, their in-laws mortgaged their homes, and they put in that bid.
Some people made huge fortunes. Some people lost big time too.
It ain't coming back at 1990/2000 levels...
No, it's not - not unless we were to import maybe 50 or 75 million young, fertile people from China or Europe.
Huge swaths of the old USA are about to become ghost towns.
See Life After People for more pictures of what's coming.
I think the smart money is repositioning for this new reality.
The problem with the old mark-to-market rules were that they valued assets at “fire sale” value. That is to say what could you get for your asset if you had to sell it in 24 hours.
That is no better a true valuation of an asset than letting the owner solely determine it’s value.
Very much agreed.... It will probably only begin around February 2010... And then continue getting worse rapidly
That all depends on their IQ and their devotion to liberty.
As things stand right now, though, our demographic situation is simply disastrous.
There literally are not enough young, productive, fertile people coming along, with IQs of 100+, who can afford to purchase [or lease] and maintain any of these properties [either commercial or residential].
What much [if not most] of the nation will be looking at is entire city neighborhoods [on the order of square miles or more] which will be abandoned to wild animals [and the occasional crack addict, although even the crack addicts won't want to live out in the proverbial middle of nowhere if it is too far from the welfare office].
Helena Handbasket, maybe.
As a commercial real estate broker, I’ve been talking about this for some time. When small private business is driven out of business by the abomination of the Obamanation, commercial properties go vacant.
“This sounds like a good time to go bargain hunting.”
Some stuff has double digit cap rates. The trick is keeping it occupied.
“there is tremendous over-capacity in all sectors.
there are no bargains if there are no tenants.”
That is a great way to put it.
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