Commercial Real Estate Bubble Feared: Prices, Vacancy Rates are High

NewsObserver ^ | 7/20/2005 | Terry Pristin

[ex-Texan]

I used to work with Mr. Zell's company in Los Angeles. There is a very good reason why he has been selling his office building into the real estate bubble. Frankly, I'm surprised he agreed to comment on the record for this report. Zell is one of the most astute and respected real estate investors in the world. He also keeps very quiet about what he knows. Read More About Real Estate Bubble?

[sharktrager]

I am in the industry, and I do think there are legitimate concerns, but they are not universal.

There are individual markets where things are illogical. I know of one, for example, that has had an occupancy slump for years, but the values are starting to rise as outside investors look for a place to park money they pulled out of markets with an obvious unsustainable growth rate. There seems to be a logical disconnect with these investors.

The good news is, these markets are easy to spot. If you imagine the bastions of blue state thought, look at what markets in red states have similar people, and you avoid those markets, you'll be fine.

Scared Bunny Blog
Not for the timid

[prognostigaator]

to be read ....later

[TigerLikesRooster]

Re #2

There are money which fly into U.S. away from political instability or economic troubles in other countries.

They usually get parked at big name cities like LA or NYC. If Chinese economy goes down, a few hundred billions of dollars could pour into U.S.. When Soviet Union collapsed, KGB funneled out $400 billion according to some reports. The same thing could happen to China on its way down. Overseas economic crises spread out over time could provide periodic injection of foreign cash into U.S. markets, especially real estate markets. They could work as a cushion which can buy time for U.S. economy.

This seems to be what is happening to U.S. Other economies fall down before U.S. does, helping U.S. economy with escaped money.

[ex-Texan]

Below is a recent post regarding local Oregon real estate prices. People in Portland are running scared. Real estate brokers are pitching the song this way, "Sign up on the waiting list for a house now. Don't wait. Houses are selling to the highest bidder within just a few days. People are paying more than the asking price everyday." The rubes and the bumpkins line up like sheep to be shorn. 'Nuff said.

http://www.freerepublic.com/focus/f-news/1445656/posts?page=10#10

[sharktrager]

Oregon is one of 3 markets where I see the investors running away, and then repeating their actions somewhere else.

Scared Bunny Blog
Not for the timid

[whitedog57]

You make an excellent point.

Is there a bubble in either residential or commercial RE markets?

Think of a "flow of funds" model. Stock returns in the US have been hovering in the 10,000 - 10,750 range. Returns overseas are flat. Bond markets offer low rates. Where do Americans and overseas investors put their money? The US real estate market.

The problem will real estate price deflation will come when 1) US equity markets rebound, 2) US long-term interest rates start rising, and 3) foreign equity markets improve. Any of these outcomes will cause a flow of funds AWAY from real estate and into other capital markets.

But until then, I can't envision a "crash."

I testified to the US Senate on the real estate market. Of course, no one listened (each Senator had their mind made up before the testimony).

[ex-Texan]

There is so much mortgage fraud going on locally it is really frightening. Won't go into details now, but you can search my FR posts. You cannot believe what is happening. The court system is corrupt. People get a Notice of Foreclosure in the mail and ninety days later they are moving out of their homes. Sheriffs enforce the court orders and people are scared out of their wits. It will get even worse, very quickly.

[TigerLikesRooster]

Re #7

Expect those senators to suddenly change their minds when the crisis comes just around the corner.

The same dynamic could be happening to China issue. For a long time, senators or most U.S. elites have been so indifferent to potentially disastrous problems lurking in Chinese economy, or China's political ambition propelled by Han nationalism.

However, suddenly, last spring in this year, a mood swung overnight in both political parties of U.S., business elites, and executive branch. For the first time, when Rummy trashes China, the rest seems to listen and turn their backs on China.

I don't know if this has been brewing in the backroom discussion among power and business elites for a while. However, the change of their public stance was rather abrupt to me. If you go back to the time as recent as 6 month ago, they were all still accommodating China.

[wtc911]

We have a portfolio of rental properties in Queens and on Long Island (not huge but enough so we don't worry about social security). Our plan called for adding another property every 8-14 months. Our conditions were simple, a co-op in good financial order with sponsor apartments available (no board approval) near a hospital and transportation. The rent had to cover the cost plus a minimum of 15%.

For years we had no problem keeping to the plan. We started the latest search about eight months ago. We have had to put the plan on hold because the market prices have risen well past the point where rental rates can support an investment. Now we're sitting on the sidelines and waiting to see if there will be a correction both sudden and deep enough to provide opportunity.

[Alia]

I think your analysis is superb.

The problem, IMHO, with the SF Market in particular? The City is pro-government, anti-capitalism. Are major investors going to want their investment properties ransacked, looted? Employees assaulted? Is it a real fear. It can be a real fear when it is clear that the police are not being backed up in re protection of private property -- by City Hall Bureacrats.

Years back, under Mayor D-Willie Brown (aided by Amos Brown et al), SF began "seizing" PG&E substations under the guise of "eminent domain". What else might be seized via "eminent domain in SF". Could be a seller's market, if the right friends can be had in City "venues"...

Witnessed some amazing things in SF rusing the Low-Income Housing -- wherein D-Politocos and Pals were able (and taxpayer funded assisted) to purchase "low-income" (read: RIGHT DOWNTOWN") properties... for $1. Watched the laundering of ownership continue. Perhaps this is a San Francisco-specific bubble, some are worried about... How long can the shell game continue?

[whitedog57]

Very insightful.

The Department of Justice is investigating numerous homebuilders over fraund with regard to FHA financing. Specifically, fraudulent practices with regards to loan underwriting and appraisal.

For example, a homebuilder qualifies buyers who can't really afford the house. In addition, they build the financing into the house price. Hence, whole new-build neighborhoods are experiencing substantially higher-than-average default rates.

Shameful lending practices. And we haven't even touched "subprime" or "predatory" lending practices. We are getting more and more like Russia and China all the time!

[Alberta's Child]

Another aspect of rising vacancy rates is that the commercial real estate industry uses some very creative methods to mask the impact of these vacancy rates on their lease rates. One way they do this is by reporting incomplete/misleading information in various industry publications.

For example, a business journal or real estate industry publication may report that "recent deals in midtown Manhattan are being signed at an average lease rate of $40 per square foot." Technically, this may be true. If you were to look at one these leases it will show a rate of $40 per square foot. But when you look at the fine print of the lease you'll find that the landlord has included all kinds of clauses and give-backs to the tenant that effectively reduce the lease rate -- sometimes substantially. If you sign a lease for $40 per square foot and the lease includes three "free" months per year for the duration of the lease, then you aren't paying $40 per square foot -- you're paying $30.

[whitedog57]

Wow, so many informed posts!

Absolutely true. Vacancy data can be incredibly misleading. For example, in one property market, a major bank moved out of the downtown leaving an entire building and numerous floors in other office building vacant. Yet, they still paid their lease payments. Hence, the empty building was reported as 0% vacancy!

And these markets have numerous incidents of "free rent" which does not appear in the vacancy data.

Finally, the accuracy of reporting has improved, but is no where near where it should. Heck, we can't even get Fannie Mae and Freddie Mac to divulge any information ... and they are government sponsored enterprises! What is the chance that we can get private market entities to behave themselves!

[glorgau]

A friend of mine was working on a data warehouse for Zell's company a couple of years back. I'm sure they have it well populated by now and are making business decisions from the data. ;-)

[jb6]

Actually mortgages in Russia are a very new thing and most require 30% down and repayment in 10 years.

[whitedog57]

Russia has a very fragmented mortgage market primarily because 1) its banking system isn't where it should be and 2) property rights issues have not been totally resolved. They are trying, but there are too many negative forces at work to allow it to grow to a reasonable size.

[whitedog57]

Russia has a very fragmented mortgage market primarily because 1) its banking system isn't where it should be and 2) property rights issues have not been totally resolved. They are trying, but there are too many negative forces at work to allow it to grow to a reasonable size.

So, while they do have some mortgages (which will not appeal to those who need them most, of course), it is unclear whether this market will succeed.

[Sam's Army]

Best practice tip: For alarming parts of an article, put them in bold. For really alarming parts, put them in red.

Oh, you already did that. Never mind.

[Mr. Jeeves]

It was only last year that the Bank of America Center, long the dominant building in San Francisco's financial district, was sold to a group of New York investors for an impressive $825 million.

Now the 52-story reddish-brown granite tower is said to be going on the market again. This time, the sellers are hoping that the price will reach as high as $1.25 billion.

The B of A building (which I am looking at right now out my office window) hasn't been full since B of A was bought and Robertson Stephens ceased to exist...not sure why the 50% price premium in one year other than mad speculation.