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The residential real estate
sector is in shambles and, some economists say, will not recover until the
end of 2010, at the earliest. Now it looks like commercial real estate may be
the next block to fall in our “Jenga economy.”
On November 19, bonds and stocks
backed by commercial real estate loans plummeted on investors’ fears
the struggling U.S. economy might lead to a wave of defaults.
Big real estate companies
suffered big losses: shares of Simon Property Group, the top U.S. mall operator, declined 13%; Boston Properties Inc., owner of skyscrapers
and office buildings in key U.S. markets, fell 12.1%.
General Growth Properties Inc.,
which owns more than 200 mall properties throughout the United State s, is teetering on the brink of
annihilation. If the flailing company can’t come up with the $958
million of its debt that is now due, and the $3.07 billion due next year, it
will have to file for bankruptcy protection.
“Ghost malls” may
become a common sight around the country, with major mall developers and
big-name retail chains like Linens ‘n Things and Circuit City going
broke and others, such as Starbucks, closing hundreds of stores nationwide. Small
businesses are even worse off as shoppers tighten their belts.
A recent Newsweek article
quipped that it would “take some kind of sorcery to keep the current
mix of store closings, skeletal inventories, hard-to-find sales staff and
anxious consumers from turning the yuletide shopping season of 2008 into a
seriously cranky Christmas. Even Santas have been getting pink-slipped.”
None of what’s happening
surprises Andy Miller, a consummate real estate entrepreneur and friend of
Doug Casey’s, who presented his outlook on the commercial real estate
market in the September edition of The Casey Report.
Miller on Retail Shopping
Centers:
“Retail are the most
exposed product type. For example, we have a grocery-anchored shopping center
in Phoenix
that’s about 94% occupied. We’ve been trying to sell it for the
last nine months. We’ve had it under contract probably four times. Each
time, it’s fallen through because the buyers were unable to find a
lender. The lack of liquidity is particularly acute in the commercial
markets.
“Most commercial mortgages
that were written over the last 10 years for most product types, except
apartments, were done by conduits, and they were done by asset-backed finance
securitizations, CDOs, etc. The overwhelming number of those conduits are now
either out of the market or shut down. There’s going to be a tremendous
upheaval in the commercial market relative to the fact that there’s
almost no conduit money available anymore.”
Miller on Office Space:
“The office market, of
course, is eroding. While I expect the central business districts around the
20 top cities in the country to probably be relatively stable in terms of
office occupancy, I think the suburban markets are going to get
creamed.”
Miller on Warehouses:
“Warehouses are bad. They’re very flat. Users are consolidating;
they’re not expanding.”
Miller on Hotels:
“I’d also be wary of
hotels. The hotel business is proliferating right now, in a way that
I’ve never seen. There are so many new hotels being built right now
nationally that there’s no way, even in good times, that I think they
could sustain occupancy. A lot of these hotels now have created new flags and
they’re putting them in multiple locations in most big cities. So
there’s been a tremendous proliferation of hotels and, with high air
fares and high gas costs, there’s no question that that’s going
to be a bad place to be.”
Miller on the Real Estate Bubble:
“There is no historical comparison to the situation today. Not even the
Great Depression was like this. I believe we’ve just lived through the
greatest expansion of capital in the history of planet Earth, in the history
of mankind.
“And this happened really all over about 12 or 13 years, this gigantic,
dynamic expansion of money. There is no precedent for this. One truth about
cycles is that the downward part of the cycle is usually quicker and more painful
than the upward swing. We didn’t get into this thing overnight. It took
many years, and we are not going to get out of it overnight. It’s going to take many
years to unwind.”
Waiting for the other shoe to
drop is an uncomfortable position to be in. Thankfully, there are a number of
lifelines we as investors can grab on to, to avoid getting sucked into the
whirlpool of declining asset values and a declining dollar… and we
should take every chance we get to use them.
How well you do in the unfolding crisis will depend on how well informed you
are. “Making the trend your friend” is now more critical than
ever to financially survive the onslaught of tidal waves rocking the U.S. economy. The Casey Report
diligently analyzes major economic trends and provides actionable advice on
how to profit from the “market riptides” – with the goal of
preserving and multiplying your assets while others capsize in the stormy
seas. Learn more here.
Olivier Garret
Caseyresearch.com
Olivier Garret is CEO of Casey Research, LLC., one
of the nation’s oldest and most respected organizations dedicated to
providing independent investors with unbiased research on opportunities to
earn extraordinary profits by being just ahead of the crowd.
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