If There's A Bottom In Sight For Commercial Real Estate, We Can't See It

The Business Insider ^ | 6-30-2010 | Keith Jurow

[blam]

If There's A Bottom In Sight For Commercial Real Estate, We Can't See It

Keith Jurow, Real Estate Channel
Jun. 30, 2010, 8:54 AM

In the last 18 months, the commercial real estate market has seriously deteriorated. Yet many analysts are hopeful that the worst is over and that pressure on property owners will begin to ease. Let's take an in-depth look at whether their optimism is justified. Early 2007: The Perfect Calm

Charles Dickens began his classic, A Tale of Two Cities with the famous opening "It was the best of times ..." That was the tone of the Mortgage Bankers Association's (MBA) January 2007 assessment of the commercial market which was entitled "The Perfect Calm." Indeed, everything looked calm and promising to the MBA.

Record amounts of investor money were pouring into the market. Delinquency rates had dropped to only 1% of all commercial real estate loans, down from the heart-stopping rate of 12% in 1991 after the S & L collapse of the late 1980s. The author of this MBA review could find little on the horizon that warranted concern except for possible overbuilding by optimistic developers.

Although the residential subprime market collapsed only three months after this report appeared, this had little effect on the commercial real estate market. For the rest of 2007, investors continued to bid on just about anything that hit the market at prices that defied traditional standards. A record $522 billion in sales transactions were closed that year according to Real Capital Analytics. The chart below shows how purchases skyrocketed from 2001 to 2007.

The Blackstone Group, perhaps the nation's leading real estate management and advisory firm, wisely sold off $60 billion of its holdings during the market peak of 2005-2007.

[snip]

[jiggyboy]

There’s any number of places in Silicon Valley I’ve seen vacant for three or four years — restaurants in Sunnyvale, a giant Wal-Mart building south of San Jose, most of the Circuit City buildings of course, small offices in downtown San Jose, etc.

[Mr. Jeeves]

I go back and forth on this one. Marginal properties with economically threatened tenants are going to get crushed, but Class A properties with tenants having long-term corporate leases in place are still a better and safer investment than almost anything else out there. I think we'll see a Great Weeding Out, with many lower quality properties abandoned and bulldozed, But the selective commercial RE investor can still do well. It just won't be 2006, where anything you buy goes up - forever.

If you are considering betting against commercial RE using an inverse ETF like SRS - forget it. It doesn't accurately track the market. Shorting the big banks is better.

[Nervous Tick]

>> There’s any number of places in Silicon Valley I’ve seen vacant for three or four years

Ever venture over to the East Bay? The business parks around Fremont have been quasi-ghost towns for quite awhile.

[ecomcon]

That’s ok, illegal, poor, and illiterate “latinos” will be the backbone of the new California economy, and they will put these buildings to good use, like indoor swap meets and Sunday afternoon semi professional wrestling venues.

[RVN Airplane Driver]

There is little hope for the socialist empire of California until they wake up and throw off the socialist shackles they have voted for themselves....which appears to be something that won’t happen any time soon.

[DaxtonBrown]

Fortunately, I now do Commercial Real Estate, or I’d really be in big trouble.

I always seem to catch a wave just as it breaks on the rocks.