What About Commercial Real Estate
Posted by Larry Doyle on March 16, 2009 12:31 PM |
On my radio show last evening, I touched on some of the pressing issues facing our economy and, in turn, our markets. These issues include residential housing, municipal finance, automotive, and commercial real estate. While the first three issues seem to get a wealth of very personal and humanistic coverage from the media, the world of commercial real estate seems much more opaque. The site of large office buildings, suburban shopping malls, upscale hotels, warehouses, and apartment complexes do not evoke the level of human emotion involved in a foreclosed home, municipal layoffs, or factory closings. That said, the problems in the commercial real estate industry should generate just as much concern if not more. Why?
These commercial properties are the glue in our entire world of global finance. While the development of the commercial mortgage-backed securities market brought a large amount of liquidity to this sector, the shutdown of that market has just as quickly sucked the oxygen right back out. What has happened as a result? The lack of a transparent market has caused an overwhelming lack of liquidity and as a result properties are not trading. Why? The disparity between perceived value from the buyers’ and sellers’ perspectives is so wide that we could drive that proverbial Mack truck through it.
While property transactions have ground to a complete halt, vacancies increase, and mortgages on the properties default, what is the end game? This unwinding is painfully slow and torturous for all involved but from my standpoint, I believe that a number of things will occur: the owners of the properties will force debt renegotiations, the holders of the mezzanine debt and the equity in the building will take ownership, and we will see ongoing real estate auctions. In all three of those scenarios, the opportunity for capital held by stronger hands will prevail.
Regrettably the glut of supply along with the lack of new development will serve as a major drag on local economies as well as the global economy for a protracted period.
Do not be surprised to see major real estate developers marching to Washington to solicit Congress for funds to ease the pain. Certainly plenty of precedent has been set to inject funds into this sector.
While a number of REITS (real estate investment trusts) appear to be quite attractive at current valuations, I expect that they will get even cheaper over the course of 2009. Bloomberg focused on one sector within this industry and writes that Retail REITS Have Further to Fall Even After 78% Decline.