01/06/10 Baltimore, Maryland – The recession forces us to ask ourselves some hard questions… like, what kind of lifestyles can we truly afford? Yet some dilemmas born of this mess don’t require much deliberation. We’ll start today with an example: Does America REALLY need a strip mall on every corner?
A record 8-10% of all available space in U.S. shopping malls sat vacant in the fourth quarter, real estate research company Reis claims today. That’s up almost two percentage points from the same time a year before, even despite asking rents falling 3.6% (another record) over the last year. Effective rents are down in all 77 markets Reis covers — you guessed it, yet another record.
“Although it appears that we have reached the end of the technical recession,” read a statement from the firm, “continuing high unemployment and inconsistent consumer spending patterns will weigh on retail properties for at least another 18-24 months.”
Construction spending on malls, hotels and office buildings will fall 13% this year, the American Institute of Architects forecast this morning. That’s a higher estimate than the group’s previous forecast back in July.
“Even a 13% decline is too optimistic,” forecasts Dan Amoss. “Through several examples, we can see that the Treasury Department’s unofficial policy for dealing with underwater commercial real estate loans is ‘extend and pretend.’ This means that as long as underwater borrowers are making monthly payments, most bank examiners will look the other way and allow banks to maintain commercial real estate (CRE) loans at artificially high values and look the other way if banks roll over maturing loans that are underwater on a mark-to-market appraisal basis. This will only make the ultimate credit losses even larger, but it’s the politically expedient thing to do.
“One consequence of the current practice of dealing with CRE loans: The bid/ask spread for commercial properties will remain wide. The market will not clear at lower prices, as it should. Rather than a sharp fall followed by a ‘V-shaped’ recovery in property values financed by capital from new owners, we’ll see a slow decline in values for perhaps a decade (like Japan). Since banks are delaying foreclosure auctions, the asking prices for most commercial properties have not yet fallen far enough to meet low bid prices. We’re hearing this from distressed commercial real estate funds that were set up to buy bargains. They’re frustrated at the lack of deal flow.
“This is bad news for CRE construction companies because low property turnover translates into idle construction activity. With an extended overhang in supply of commercial property, which will be slowly released from bank balance sheets, demand for new commercial construction will remain weak.”
Ian Mathias
Ian Mathias is the managing editor of Agora Financial’s Income Franchise, where he writes and researches about retirement, dividend and fixed income investing. Much of his work is featured in The Daily Reckoning and Lifetime Income Report – Agora Financial’s flagship income investing advisory.
Previously, Ian managed The 5 Min. Forecast, a fun, fast-paced daily look into the future of global markets and macroeconomics. He’s also worked in public relations, where media outlets like Forbes, AP, Yahoo! and MSN Money have syndicated his writing. If he’s not at work, you’ll probably find Ian on a bicycle, racing up and down the “mountains” of Baltimore County. Ian has a BA from Loyola University in Maryland.
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As we become a have’s and have naught’s society, CRE will adjust accordingly. Saks 5th Avenue, Wegmens and Walmart will survive all others are destine to fail.
Of course, federal politicians are reluctant to allow RE prices drop–property tax is where local communities generate most of their revenue.
Personally, I’d like to see an end to federal backing of any RE loans subject to property tax. That should accelerate the necessary correction. (Disclosure: I’m a renter, and would like to see RE prices fall to afforable levels.)
The could still clear the market now that most of the banks have been some what recapitalized… Look at Japan, it hasn’t worked… Bernanke and crew must know that the only true way to recover is via creative destruction… All the elites have been rescued so, I don’t see why they would keep holding the wall of pain… They are probably trading into weak hands and taking short positions as we speak…
I think overall there is a glut of commercial real estate in most major cities, but it’s so hard to tell because markets around the country are so segmented.
-Keith
The subsidization of RE loans is designed to help banks and REITs, not renters of commercial space or mom/pop retailers.
Like the goobermint’s failed backing for underwater residential loans, this process helps those who already have, extends the pain of a necessary correction, fools decision-makers (who should still know better), and wrongly allocates resources that could be better used elsewhere by the private sector.
But, what the hell, the goobermint doesn’t care. It’s not their money.