State of Denial

While working out the other night in the gym, I was watching CNBC's business yak machine--they had on one of their "house" economists, the 30-something guy with the high forehead from Deutsche Bank, squaring off with a principal from one of the big real estate private equity funds. The topic was "Is commercial real estate the next leg down?" The economist rattled off rising vacancy numbers and talked about how increasing unemployment would crash office markets. The private equity guy said everything would be okay as long as the banks were lending TARP money so real estate borrowers could refinance. "Fundamentals have held up," he said, "and there haven't been any transactions so values haven't dropped." They went back and forth like this for five minutes and it was on to the next Bernie Madoff segment.
 
But it all left me wondering. Are there still people out there like this private equity guy in such a state of denial? Do some investors still really think that commercial real estate's problems are all about the capital markets? That their overpaying and overleveraging in the 2005-2007 speculative flip fest hasn't left them totally vulnerable to this harsh economic downturn? And that most of these investments aren't under water and that refinancing won't present painful realities even when money flows again?
 
This private equity guy should take a walk around Manhattan or some suburban mall and see all the "going out of business" signs in store windows. Then he should check in with his local condo broker and see if she is getting any calls. After that he might make the rounds of some office leasing brokers and tally up the phantom space that is starting to add up as layoffs take hold. And if he wants to book a hotel room, he might find rates are a whole lot lower than a year ago and it's not so hard finding a room.
 
But should I be surprised. A heavy dose of denial is part of the reason we are in this mess today.        

Comments

[Wally Antoniewicz]

I believe 2009 will be a very tough year for commercial real estate, including all the 4 major property types - office, retail, industrial, multi-family as well as hotel . The crucial considerations will be how high unemployments gets by the end of this year and if lenders will start providing necessary financings to close deals.

[Chris T]

Why is it in a majority of your posts you need mention condo's, and what their buy/sell action might be in the present? Anyone working in commercial real estate and living West of the Hudson couldn't give a rats ass about condo's, enough already with the condo's. If you live in New York and own a condo great, if you own a coop great, but for those of us in the rest of the country we live in houses, and the action in these houses has little to do with why banks won't finance our industrial or office purchases, or why there is such a large CAP spread between buyer and seller in the present market.

We have some problems to workout as an industry. And the capital markets aren't making this workout any easier. We will work through the problems, there will be carnage left in the trails as we forge forward, and as in any market correction are markets will be strengthen through the correction.

Now go buy yourself some new glasses from the optomistic optometrist, your vision is being blurred by pessimism.

[Chris T]

Why is it in a majority of your posts you need mention condo's, and what their buy/sell action might be in the present? Anyone working in commercial real estate and living West of the Hudson couldn't give a rats ass about condo's, enough already with the condo's. If you live in New York and own a condo great, if you own a coop great, but for those of us in the rest of the country we live in houses, and the action in these houses has little to do with why banks won't finance our industrial or office purchases, or why there is such a large CAP spread between buyer and seller in the present market.

We have some problems to workout as an industry. And the capital markets aren't making this workout any easier. We will work through the problems, there will be carnage left in the trails as we forge forward, and as in any market correction are markets will be strengthen through the correction.

Now go buy yourself some new glasses from the optomistic optometrist, your vision is being blurred by pessimism.

[chris hauser]

to sum it all up: the arithmetic don't work.

[Gary S]

What we're seeing is the tip of the ice berg. Where's the debt source over the next couple of years to refund all of the poorly underwritten CMBS deals that are maturing? Not even China wants our debt anymore.

[JH in Seattle]

Assuming capital markets aren't the way out for CRE, is there a fix. Or is it simply survive and wait until the market crashes back to good fundamental levels?