Slow motion crash

The commercial real estate markets are like one of the last cars in a chain reaction highway pile-up. We hear the noise up ahead, the red lights in front start shining in drawn out succession, we put on the brakes too, but we are too close and traveling too fast to avoid the crack up. Right now we are at that point of suspended animation where time seems to stretch out before the inevitable crack up.

Remember a year ago when it was just the housing markets that faced trouble -- that was the first collision, followed by the subprime mess, which took out several cars including the mortgage banks, followed by writedowns at the major investment banks, the Bear Stearns collapse, Lehman's troubles, various CEO ousters, and now more writedowns. Wall Street inexorably axes lots of execs and all the banks downsize -- its hard to get a fix on how many jobs, but the number of resumes flying around gets thick like ticker tape. The first real estate casualties were the dealmakers, who bought at frothy highs last spring, and the lenders who blindly bankrolled them. Hotels and malls start to feel the pinch of the economic downturn. Cap rates have edged up, as predicted, and now it's about time we see net operating incomes start to shrink as vacancies increase and tenant demand diminishes.

Today, the commercial property transaction markets resemble housing circa late 2006 when sellers thought they could still get top dollar and buyers were waiting for prices to fall. There's a transactional bid/ask disconnect and deals aren't happening. Buyers now get more certain that a fall is coming, and some sellers get more motivated. Once sellers capitulate, market values will start to track down and the correction will take hold. Then we'll start to see defaults and foreclosures bump up too.

If anyone thinks values and returns aren't headed down, let's hear about it. If you're a buyer and have cash, hold on. Good times lie ahead. Just fasten your seat belts in the meantime. 

   

Comments

[Wally Antoniewicz]

Love that "chain reaction" analogy.

[Daniel Sullivan]

I read your blog comments on the state of Commercial Real Estate. I'm a conference producer in Los Angeles. Our main business is in infrastructure and renewable energy, however, when we see developments worthy of a conference, we put one together. We are having a Commercial Real Estate Workouts & Turnarounds conference in Irvine, CA, in July, and in Miami, in October. We have some pretty good speakers. It will be interesting to see what comes out of this conference...www.infocastinc.com/reo_workouts

[Gary]

Jonathon

I think you will agree this is only part of the problem. I don't see anyone talking about the other part though.

The REIT's have gobbled up so much of the investment grade commercial properties at lower CAP rates that sellers think they are "entitled" to values based on these low CAP rates.

It's my belief that the bargains will be had when the REIT's begin to crash (just like they have historically).