Commercial Real-Estate blow up...

J

jbenko_IHB

New member
For those of you real-estate buffs...



Our economy is blowing up because it was built on debt...people spending, spending, spending...

Now that people are saving and nobody is spending, wouldn't this eventually cause an implosion of the commercial real-estate market which hasn't really declined to the extent real estate has?



Wouldn't shopping malls, chain stores, etc all go down? I'm thinking that we are going to enter a very dark period deflation....then followed by nasty inflation down the road...



Thoughts?
 
[quote author="blackvault_cm" date=1226585368]For those of you real-estate buffs...



Our economy is blowing up because it was built on debt...people spending, spending, spending...

Now that people are saving and nobody is spending, wouldn't this eventually cause an implosion of the commercial real-estate market which hasn't really declined to the extent real estate has?



Wouldn't shopping malls, chain stores, etc all go down? I'm thinking that we are going to enter a very dark period deflation....then followed by nasty inflation down the road...



Thoughts?</blockquote>


I meant to respond in more depth in the daytrading thread about your prediction for the downside of the Dow earlier. But this thread is probably more appropriate.



This next statement isn't for you. It is intended for others who may not understand the definition of inflation and deflation. Most people *THINK* they understand the definition, but they are wrong.



Both inflation and deflation are monetary phenomena. More precisely, they are monetary illnesses caused by an imbalance in an economy between the supply of money and the demand for goods and services in that economy. In an inflationary environment, there is too much money for the available goods and services. The laws of supply and demand being what they are, the prices of those goods and services will go up to "soak up" the excess funds available. Deflation is the opposite.



OK, with that out of the way, on to your question.



I've long felt (and even stated on this environment) that all of the money going to money heaven because of stupid loans will lead to deflation. Of course, the Fed and the Treasury are working overtime to prevent this from happening. But the signs are still there that Bennie and the Inkjets can't print money fast enough. (I believe that recent strength in the dollar is a result of these deflationary forces)



People saving money wouldn't be deflationary. On the contrary, if saving became a new religion in the United States, the excess capital available would need to find a way to be used, and business would expand organically. In the beginning of such a shift, the economy would expand slower than it would if people were to spend everything they make. But after a short while, the potential spending would increase as peoples disposable income rose from investing their savings and from the economic growth that results from a capital base that has ready access to money.



That having been said, I believe that the commercial real estate market will suffer a fate similar to that of the consumer market. It's on a different schedule because of different profiles of the borrowers. But there is a serious lack of liquidity in the marketplace because banks are having hard times meeting their mandated reserve ratios. Again, supply and demand. If you can't borrow tens of millions of dollars to build or buy office buildings, then the market will come down to the point where supply of money and demand for goods find equilibrium.



Now, on to the comment I wanted to make to you earlier. You mentioned that your downside target in the Dow was 7,000, but that if Obama put $2 trillion into infrastructure, you would go long in a heart beat. While I always adapt my view of the future to changing conditions, I believe you have a misread of the macro environment if there is a large infrastructure build. I don't think you will be surprised to hear that I don't believe in Keynesian economics. But whether you agree with me or not, I believe it would be a good idea for you to study what happened to the stock market when FDR put various public works projects in place. (hint: The direction wasn't up)
 
[quote author="blackvault_cm" date=1226585368]For those of you real-estate buffs...



Our economy is blowing up because it was built on debt...people spending, spending, spending...

Now that people are saving and nobody is spending, wouldn't this eventually cause an implosion of the commercial real-estate market which hasn't really declined to the extent real estate has?



Wouldn't shopping malls, chain stores, etc all go down? I'm thinking that we are going to enter a very dark period deflation....then followed by nasty inflation down the road...



Thoughts?</blockquote>
Here's the problem with commercial real estate...(this is from my days of working in the real estate department of a insurance company that made permanent mortgages on commercial real estate). Back in the ealry 2000s, the securitized CMBS market really began to grow. To grow the loan volume, wall street I-banks would offer lower interest rates and higher leverage than insurance companies (these loans are typically 5-10 year term loans with 25-30 year amortization so at the end of the term you better refi because you got a balloon payment coming). So most all commercial real estate loans made until 2002-2003 might be ok because they used higher cap rates and didn't max LTVs. Starting in 2003, the CMBS underwriters began to use "forward rents" to underwrite the loan (i.e. they used year 3 rents to ensure that the minimum DSCR was met) with a stable vacancy rate which resulted in a breakeven DSCR at loan closing. Then they began to offer 3-5 year interest only commercial real estate loans that needed to cover debt service on an interest rate only basis. Oh btw, all those loans were NON-RECOURSE as you totally cashed out the developer. Just to give you an idea of the rates, at the very peak CMBS lenders were offering fixed Treasury + .80% loans (around 5%). So the crap will hit the fan when those 2003+ CMBS commercial real estate loans come due because of low cap rates that were used to underwrite recent loans, using interest-only to calculate the debt service ratio, using ultra low vacancies, and having to refi with an interest rate that is near 7% (REITS like General Growth and Prologis will be taken out back and shot because they can't refi their loans). All that will require a loan paydown or the keys get tossed back to the lenders (similar issue as homeowners who are underwater and want to refi).



Then there are those crazy construction loans that many banks made...but that's for another post.
 
[quote author="blackvault_cm" date=1226585368]For those of you real-estate buffs...



Our economy is blowing up because it was built on debt...people spending, spending, spending...

Now that people are saving and nobody is spending, wouldn't this eventually cause an implosion of the commercial real-estate market which hasn't really declined to the extent real estate has?



Wouldn't shopping malls, chain stores, etc all go down? I'm thinking that we are going to enter a very dark period deflation....then followed by nasty inflation down the road...



Thoughts?</blockquote>


How long do you think before the increase in money supply affects everday prices? Historically, the lag is about one year, but there is a heck of a lot of credit contraction out there.
 
[quote author="blackvault_cm" date=1226585368]For those of you real-estate buffs...



Our economy is blowing up because it was built on debt...people spending, spending, spending...

Now that people are saving and nobody is spending, wouldn't this eventually cause an implosion of the commercial real-estate market which hasn't really declined to the extent real estate has?



Wouldn't shopping malls, chain stores, etc all go down? I'm thinking that we are going to enter a very dark period deflation....then followed by nasty inflation down the road...



Thoughts?</blockquote>


absolutely... you mention malls -- well what used to be the second largest mall company is on the verge of bankruptcy.

<a href="http://finance.yahoo.com/q?s=GGP">http://finance.yahoo.com/q?s=GGP</a>

also this company - PLD, the largest industrial landlord in the world

<a href="http://www.reuters.com/article/marketsNews/idINN1226978020081112?rpc=44">http://www.reuters.com/article/marketsNews/idINN1226978020081112?rpc=44</a>



although.... if i were to play devils advocate i might ask if an implosion in that sector has already occurred. US REITs were down 18% in 2007 and 50% in 2008! in relative terms, they have underperformed the broad mkt by 10% this yr and 25% last yr.



so while its hard to find a reason to like commercial RE, its also hard to like a short that's already suffered 35% more than the S&P in the last two yrs. if the broad equity mkt has gotten a swift kick in the groan, then commerical RE has gotten the same kick, two purple nurples, and three hearty b****slaps. of course the sector could plummet another 25%... but what sector couldn't? in other words, no doubt being a commercial landlord right now is as bad as any business out there, but its the classic question of "what's already priced in"?



thats my roundabout way to basically not give a definitive answer ;)
 
If you want to see an example of how one industry is impacted, by the comprehensive nature of the economic situation, you can <a href="http://www.bythom.com/2009predictions.htm">check this out. </a>



Or maybe I just liked it because he used the word "econopanicolypse."
 
[quote author="blackvault_cm" date=1226585368]For those of you real-estate buffs...



Our economy is blowing up because it was built on debt...people spending, spending, spending...

Now that people are saving and nobody is spending, wouldn't this eventually cause an implosion of the commercial real-estate market which hasn't really declined to the extent real estate has?



Wouldn't shopping malls, chain stores, etc all go down? I'm thinking that we are going to enter a very dark period deflation....then followed by nasty inflation down the road...



Thoughts?</blockquote>


You bring up a very good point.

People are still in denial.

Thus far, at least in CA, commercial RE has been lagging the overall economy.

Valuations remain extremely high and cap rates are very low, sub 6.

That will all change if the economy doesn?t improve and retail continues to decline.

The shoddy underwriting the Trojanman mentioned is gone.

No more i/o loans based on proforma numbers.



Getting back to your post.

Prices on commercial properties have yet to significantly decline.

They will because rents on commercial are out of whack.

Now that businesses are slow, the high rent is eating them alive.

Unless they are well capitalized, eventually they?ll fold and the place will go dark.

Look around Orchard Hills Plaza, outside of Peets, Zov?s, and a few other shops the place is a ghost town.

Stores around the perimeter are hurting for business.

The high rent is suffocating them during this difficult time.
 
[quote author="awgee" date=1226587552][quote author="blackvault_cm" date=1226585368]For those of you real-estate buffs...



Our economy is blowing up because it was built on debt...people spending, spending, spending...

Now that people are saving and nobody is spending, wouldn't this eventually cause an implosion of the commercial real-estate market which hasn't really declined to the extent real estate has?



Wouldn't shopping malls, chain stores, etc all go down? I'm thinking that we are going to enter a very dark period deflation....then followed by nasty inflation down the road...



Thoughts?</blockquote>


How long do you think before the increase in money supply affects everday prices? Historically, the lag is about one year, but there is a heck of a lot of credit contraction out there.</blockquote>


I don't know honestly. Thats what I'm trying to measure. I know when inflation does come in...it will be very viscious.
 
[quote author="tenmagnet" date=1226629169][quote author="blackvault_cm" date=1226585368]For those of you real-estate buffs...



Our economy is blowing up because it was built on debt...people spending, spending, spending...

Now that people are saving and nobody is spending, wouldn't this eventually cause an implosion of the commercial real-estate market which hasn't really declined to the extent real estate has?



Wouldn't shopping malls, chain stores, etc all go down? I'm thinking that we are going to enter a very dark period deflation....then followed by nasty inflation down the road...



Thoughts?</blockquote>


You bring up a very good point.

People are still in denial.

Thus far, at least in CA, commercial RE has been lagging the overall economy.

Valuations remain extremely high and cap rates are very low, sub 6.

That will all change if the economy doesn?t improve and retail continues to decline.

The shoddy underwriting the Trojanman mentioned is gone.

No more i/o loans based on proforma numbers.



Getting back to your post.

Prices on commercial properties have yet to significantly decline.

They will because rents on commercial are out of whack.

Now that businesses are slow, the high rent is eating them alive.

Unless they are well capitalized, eventually they?ll fold and the place will go dark.

Look around Orchard Hills Plaza, outside of Peets, Zov?s, and a few other shops the place is a ghost town.

Stores around the perimeter are hurting for business.

The high rent is suffocating them during this difficult time.</blockquote>


I hear you. Many days I feel I'm the only one eating at Zovs and chilling at Peets. Then again I don't have anywhere else to go.
 
This answers a lot everybody and it reconfirms my thoughts. I really appreciate it. I'm not a real-estate expert, but I like to follow it as it impacts where our economy is going.



So what I'm hearing is that a viscous downward cycle will happen if consumer spending doesn't turn around. Considering that average income for a person has gone down the past 8 years, but yet our economy grew simply shows that people lived beyond their means which now came to a complete halt.



So basically we are creating our own lost decade...maybe two as things iron out.
 
[quote author="blackvault_cm" date=1226629431]



I hear you. Many days I feel I'm the only one eating at Zovs and chilling at Peets. Then again I don't have anywhere else to go.</blockquote>




It?s kind of sad.

I go to the same places.

Seems to pick up a little on the weekends but during the week it?s very quiet.

In my opinion, rents are way too high for retail business to thrive.

Most are in survival mode right now, playing defense.
 
[quote author="blackvault_cm" date=1226629322][quote author="awgee" date=1226587552][quote author="blackvault_cm" date=1226585368]For those of you real-estate buffs...



Our economy is blowing up because it was built on debt...people spending, spending, spending...

Now that people are saving and nobody is spending, wouldn't this eventually cause an implosion of the commercial real-estate market which hasn't really declined to the extent real estate has?



Wouldn't shopping malls, chain stores, etc all go down? I'm thinking that we are going to enter a very dark period deflation....then followed by nasty inflation down the road...



Thoughts?</blockquote>


How long do you think before the increase in money supply affects everday prices? Historically, the lag is about one year, but there is a heck of a lot of credit contraction out there.</blockquote>


I don't know honestly. Thats what I'm trying to measure. I know when inflation does come in...it will be very viscious.</blockquote>


I am in complete agreement.
 
[quote author="blackvault_cm" date=1226629831]This answers a lot everybody and it reconfirms my thoughts. I really appreciate it. I'm not a real-estate expert, but I like to follow it as it impacts where our economy is going.



So what I'm hearing is that a viscous downward cycle will happen if consumer spending doesn't turn around. Considering that average income for a person has gone down the past 8 years, but yet our economy grew simply shows that people lived beyond their means which now came to a complete halt.



So basically we are creating our own lost decade...maybe two as things iron out.</blockquote>


The way I see it, the only way consumer spending can turn around is if it appears to the consumer to be advantageous to go further into debt.
 
And, of course, this is all overlaid with the reality of boomer demographics. Not a single financial/econ pundit ever seems to notice the fact that the boomers are declining in lifetime earnings power as these markets decline (or that their lifetime earnings peak coincided perfectly with the maximum rate of inflation in the stock market ten years ago).
 
[quote author="tenmagnet" date=1226629169][quote author="blackvault_cm" date=1226585368]For those of you real-estate buffs...





Thoughts?</blockquote>




Getting back to your post.

Prices on commercial properties have yet to significantly decline.

They will because rents on commercial are out of whack.

Now that businesses are slow, the high rent is eating them alive.

Unless they are well capitalized, eventually they?ll fold and the place will go dark.

Look around Orchard Hills Plaza, outside of Peets, Zov?s, and a few other shops the place is a ghost town.

Stores around the perimeter are hurting for business.

The high rent is suffocating them during this difficult time.</blockquote>


The comment that prices on commercial properties have not significantly declined is wrong. I work in commercial RE investment. Cap rates on apartments have moved from the 4.5% to 5.0% range to the 6.0% to 6.5% range. And they are not done going up.



Assuming the income stream remains stable, that movement in cap rate results in a 25% decline in the value. That is consistent with what has already happened in the market.



On top of that, in many markets the income has gone down. So cap a lower income stream at a higher cap rate and you are getting 30% declines in value. I have already seen several commercial properties decline by at least 30% in value. Values are dropping like a rock over the last 90 days.
 
[quote author="Joe33" date=1226650370][quote author="tenmagnet" date=1226629169][quote author="blackvault_cm" date=1226585368]For those of you real-estate buffs...





Thoughts?</blockquote>




Getting back to your post.

Prices on commercial properties have yet to significantly decline.

They will because rents on commercial are out of whack.

Now that businesses are slow, the high rent is eating them alive.

Unless they are well capitalized, eventually they?ll fold and the place will go dark.

Look around Orchard Hills Plaza, outside of Peets, Zov?s, and a few other shops the place is a ghost town.

Stores around the perimeter are hurting for business.

The high rent is suffocating them during this difficult time.</blockquote>


The comment that prices on commercial properties have not significantly declined is wrong. I work in commercial RE investment. Cap rates on apartments have moved from the 4.5% to 5.0% range to the 6.0% to 6.5% range. And they are not done going up.



Assuming the income stream remains stable, that movement in cap rate results in a 25% decline in the value. That is consistent with what has already happened in the market.



On top of that, in many markets the income has gone down. So cap a lower income stream at a higher cap rate and you are getting 30% declines in value. I have already seen several commercial properties decline by at least 30% in value. Values are dropping like a rock over the last 90 days.</blockquote>


My comment was on retail and not multifamily.

I don't know or follow the multifamily market.

As far as retail goes, I've only recently scene a 7 cap on retail here in the OC and that's at a $4M price point.
 
I was concearned on retail. Multifamily for me is rolled under residential whether that is a right or wrong. Main reason why I want to know all this is whether or not our future is going to get worse or better. Then I have to decide if its priced into the stock market...I'm guessing not so much...



Meaning...I'm going to continue to short the market, but a little more cautiously.
 
Joe33,



Find me retail here in the OC at and 7.5 cap or better, and we?ll do business.

It?s just not out there yet.

Especially at the lower price point.

Transaction volume in commercial re has dried up.

Look at the latest numbers from CB.

Cap rates need to move higher and in some cases they already are.

Unfortunately, there?s still a long way to go, thus retail remains overpriced.

Not all sellers have gotten the memo yet.

I believe they will starting in ?09
 
This isn't multi-family or retail, but 100 Discovery in Irvine was foreclosed on last week for about $1.2mil. I'm not sure exactly what type of space it is, but the lower addresses of Discovery are office buildings that house companies like Fluor and State Street. I will try to check it out next time I am there, but I would imagine it is a similar space to that of the lower addresses.
 
[quote author="graphrix" date=1226651916]This isn't multi-family or retail, but 100 Discovery in Irvine was foreclosed on last week for about $1.2mil. I'm not sure exactly what type of space it is, but the lower addresses of Discovery are office buildings that house companies like Fluor and State Street. I will try to check it out next time I am there, but I would imagine it is a similar space to that of the lower addresses.</blockquote>


Let me be specific, two weeks ago I sat thru a pitch on retail.

It ended up being Cantaloop?s building.

Turns out the developer needs cash to finance the rest of the project.

From what I can tell, Cantaloop?s shop is on the front pad.

They?re asking $4.7M at a 7 cap.

I?ve seen nothing but garbage at a lower price point 6-7 cap.

Commercial needs to come down substantial here in the OC.

Maybe it?s starting to but we have a ways to go.



Btw, nice sweater yesterday
 
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