CR,
Do you have any useful suggestions for looking at long term CRE trends and the general economy? Obviously dollar valu or expenditures either compared to GDP won't be useful as the nature of commercial space has changed so very much. Retail space per GDP? Or per retail component of GDP? Mfg + Ofiice space per non consumer GDP?
I guess what I'm looking for by picking your vast and superior brain is whether we got ahead of demand for nonresidential space as we obviously have for housing.
If you want to do more research, just compare the amount of retail space per capita in the U.S. today with any other country in any other time period ever. You would be shocked.
Awhile ago, retail chains (stores and restaurants) stopped paying any attention to analysis based on local demographics and buying power per sq ft. They just made a land rush to put as many sq. ft. as possible into play to drive out competition. Only...most of the competition is still there.
First big retailer to dump vast acreage onto the market and go out of biz...Circuit City.
Off topic, but pretty hilarious quote from a Japanese "capitalist innovator":
``The worst of subprime-related trouble is mostly behind us, thanks to various efforts by U.S. officials,'' said Ryoji Musha, chief investment officer at Deutsche Securities Inc. in Tokyo.
That's right. Everything was just a bad dream...we can go back to pumping up the markets again.
There is no biz that is more vulnerable to recessions than consumer electronics. You get hit by price deflation (e.g., flat-screen TVs) and declining volume at the same time. You can't even liquidate inventory for cost. CC doesn't have the balance sheet to absorb writedowns.
Wanna bet $780 BILLION instead of that wimpy guess.
I bet over 780 by the end of 09!
Any takers on the under? I think that the next damage will be in this sector, followed by credit cards, and finally us govt GSE debt, and then universal default. Worse case scenario of course- this could never happen in the real world, as the fed would start monetizing to stop the panic. Like they already are.
"In the '01 recession, CRE investment was hit pretty hard (unlike residential investment), so there probably isn't the significant excess supply that exists for residential real estate."
I think this time it has more to do with inflated prices. But remember, there is still some heavy CRE building going on.
The UK commercial property market is also showing signs of trouble, and two major CRE funds have recently imposed redemption restrictions on institutional investors (mandatory 90-day notice period).
SHLD is a freaking joke. It's diversified all right, you have a fourth rate retailer combined with a declining department store that's closely tied to home sales. Oh, yes, then you have all the savvy investments, like a big bet on Citi at the end of the summer...
They are some of my most profitable puts and I'm betting they'll double again by spring...
CR- Mish has created several threads on a commercial meltdown. I think Dr Roubini has done some work as well.
I'm making sense of the 'systemic' side of this perfect storm by viewing credit as a toxin. The oversupply after Y2K, and the 0% prime after, was like a carcinogen for the economy. All the big credit consumers are in the process of going belly up, dead but they don't know it yet.
I don't know about most other places, but the Baltimore to Richmond corridor is severely overbuilt commercially. All you have to do is drive around and look at the buildings - not many full parking lots, and leasing signs everywhere. Business that go under or move out of office or retail space don't seem to be replaced by new tenants very quickly.
I think the loss will be closer to $78B than $11B, but AlanM might be right - it's probably going to be $780B.
Telegraph UK - Please for rate cut as interbank loans dive. The sterling interbank market has collapsed at the fastest rate in modern history, prompting pleas for immediate rate cuts from a chorus of top British economists. "This is one hell of a shock to the financial system..."
I hate to ask silly questions but since we are all now subprime, how about you humor me. When we all refer to the CRE market, what exactly are we referring to? As I walk around I see large office buildings, malls, retail/office mix, residential retail mix, residential towers, government buildings. What is considered CRE and what isn't?
tj & the bear I think alot of the debt is held by small regional lending institutions. There are several types of debt, short term construction loans, medium term mezzanine, long term take out loans. Long term loans are easily sold, short terms are mostly kept on books. The short term loans are much more vulnerable to loss than final loans are as the income streams are less stable or in the worst case non-existent.
WSJ - Lennar, Morgan Stanley Forge Land Model.. Home builder Lennar Corp. has sold about 11,000 home sites to a venture mostly owned by the real estate arm of Morgan Stanley for $525 million, a large land sale that signals that investors have begun to pounce on bargain deals. Troubled Builders, Bargain Seekers United - WSJ.com
Washington State just passed a property tax relief bill that allows many homeowners to defer up to half of their property taxes. The money owed earns interest to the government. What's the interest rate? ~7% adjustable! As if that wasn't bad enough, an ammendment which "simply required disclosure to homeowners that they would be charged a variable interest rate on their deferred taxes" was apparently rejected.
Thanks for the link to Stein's article. I agree in that I am also not a fan of his. His big point seems to be that Goldman Sachs could be tipping the economy into depression by maximizing its own profits. Whatever.
The shorter version of the first page of his column is as follows:
There hasn't been a depression since the depression (which was a long time ago), so a depression is very unlikely.
All his subsequent insights seem to be built upon this brilliant insight...
"The commercial property sector is not likely to suffer the huge falls experienced by the worst-hit residential markets ... Supply is near its tightest point in decades."
Dude, pass the bong. That sounds like some awesome weed.
It's good to be a small furry mammal in these times, but you still gotta watch out for the falling dinosaur carcasses.
mal | 12.02.07
This is probably a reference to a great Far Side cartoon of a bunch of dinosaurs making fun of a small furry animal, but the dinosaur on the end has just noticed a first snowflake.
What is "commercial" various a lot with who is asking and who is counting. By one standard it can be anything bigger then a duplex.
Other categories that are often in commercial or not are industrial, and institutional. Most of your financial aggregators include them within commercial work.
One of the better indicators to look for where commercial construction is going is the AIA Architect Billing Index. It is a relative strength index. And is usually about 9 to 12 months ahead of actual construction. From a common sense point of view it is a fairly practical tool. Architects are needed for almost any serious type of building, and they do most of their billing on the front end of a project.
The index went up most recently (October) after 2 down months.
Right now is the time of year when there usually is a little slowing down in the construction market anyway. In most areas of the US it is either too cold or too wet (even in the South the ground will stay wet a lot longer after a rain in 40 degree temps).
You are seeing a lot of institutional projects. These are often very large, and have such long lead times they are almost counter-cyclical.
Wachovia is a major player in commercial construction lending. I saw some of their literature from August that indicates that conduit lending is completely seizing up. But that won't particularly effect the institutional work (which is tax revenue based). I think that is where the surge in AIA billing is coming from.
A lot of people in commercial construction are worried. It is getting tighter in some areas, but not at a standstill. My guess is that the mid-size institutional work will dry up at the end of this coming summer. Somewhere during that summer you would expect see many many contractors showing up at every bid, and the over-leverage, or those surviving on cash flow (versus profits) will start to fall very quickly.
Of course with a big implosion coming from the Mega-Residential Builders coming somewhere within that time frame, it may be that nobody notices.
The Ben Stein Sunday NYTimes article had an interesting split personality. The first part was that a GS analyst (Hatzius) had overstated the seriousness of the situation, while the second part called for an investigation of GS simultaneously issuing large amounts of loan-based paper and shorting it. Stein credits a Fortune article for the material in the second part.
Stein suggests that Hatzius' work has helped the short position, but that seems to me a minor aspect of the situation.
Mark, I am so bummed. You have all these great links to your homepage but it still bumps me after 2 seconds and says something about "robots.txt" on a Dell search page it takes me to. Oh well.
I especially liked the part where Mr. Beals...is that his name, is called into the boardroom and told, there is no usa there is no france there is no ussr nor brazil nor china...there is just mobile, exxon, ge, union carbide (and he goes on with the dow 30... (I may have the list wrong but you get it)...
and no pounds, nor yen nor deutchmarks...just petrodollars ?
There's no smoking gun here. This bit refers to third quarter 2007, not 2006 when Goldman was selling the deal in question. Whether Stein likes it or not, it's acceptable to hedge your trading inventory. Now if Stein could find some proof that the firm was net short mortgage risk in 2006 when it was peddling this paper, that would be damning indeed.
[snip]
Finally, we have this priceless bit of analysis:
He [Hatzius] is also postulating that lenders would have to retrench so deeply that lending would stall and growth would falter an event that, again, has not happened on any scale in the postwar world, except when planned by the central bank.
Stein apparently can't locate Japan on the map. Its post-bubble contraction was even worse than what Hatzius forecasts for America, and was most certainly not planned by the Japanese authorities.
On topic we are clear cutting a forest somewhere to make for lease signs for retail/office space in Colorado Springs. Every single building in this town has at least one vacancy. It is almost surreal to drive around here.
I know after Christmas all hell will break loose as retailers contract to handle their new reality.
I went to the mall this afternoon and the mall was less than 1/2 full. We only have 2 real malls in this town of 1/2 a million so we aren't over served in my opinion. The one thing I bought when I went to pay I was the only one checking out with 6 lanes to choose from.
You might try the following free tools to see if something isn't hijacking your computer. Other than that, I don't know what the problem might be. It is very odd that it keeps taking you to Dell. Very odd indeed.
I went to the mall this afternoon and the mall was less than 1/2 full. We only have 2 real malls in this town of 1/2 a million so we aren't over served in my opinion. The one thing I bought when I went to pay I was the only one checking out with 6 lanes to choose from.
Be a real patriot. Go back and spend more. And if you must, do it one purchase at a time. It'll make the customer count look good. It's good for the economy and it'll keep a few more checkers employed. And,...it'll keep you from wasting your time reading wise-cracking bloggers! It's a win-win!
I'm a commercial real estate broker representing tenants in downtown San Francisco. Many of us were awestruck by the psf price Blackstone cheerfully shelled out to acquire Equity Office Property s San Francisco portfolio in May of this year. The pro forma for their insane psf purchase price required rental rates to hit around dot.com level rents not only in the marquee buildings like One Market (Waterfront property overlooking the Ferry Building), but the standard Class A and B office buildings in tertiary markets like South of Market (SOMA) and the North Waterfront.
But Blackstone wasn't too concerned as they promptly sold substantial portions of the EOP portfolio to another tranch of bagholders further down the CRE food chain including Morgan Stanley and Beacon Properties. To make their new purchase price make sense, these new owners need to exceed dot.com era rents by a substantial margin. Six months later, none of the asset managers I talk to are anywhere near hitting their numbers and leasing activity is at a standstill.
The only references I see to the CRE market now are eerily similar to the early rumblings in subprime a few months ago. The bag holders for this fiasco will be many and the damage severe.
"California's statewide median price was down $33,720 to $497,110, putting the two-month decline at a remarkable $91,860. The month's supply of home inventories was down slightly from September to 16.3 months, this compares, however, to the year ago 6.4 months."
Anecdotally (but maybe one of the experts here could tell me if there is something to this)--whereas in my part of San Diego, the building of housing has noticeably slowed in the last month, as developers seem to have quit working on already leveled tracts, the construction of office and light industrial space seems to be rapidly continuing. I have no idea what businesses will take up this space! I wonder if San Diego will lead in a CRE crash just as it led in the bursting of the housing bubble? Down here in lower SoCal, we're cutting edge, baby!
If there was any doubt that we are in a credit crunch, this would seem to remove all doubt. Can anyone remember banks asking (begging?) clients not to access their credit lines?
At one point, some loans actually exceeded property values. Now, typical loan-to-value ratios have retreated to about 70 per cent when deals are completed at all.
CR (or anyone else) is 70% a real deal killer? I assume that means the borrower has to put 30% down (where the >100% deals mentioned in the article were CRE equivalents of 'cash back' deals).
And are the deals falling apart from the lender walking or from the borrower balking?
If a developer has to come to the game with 30% of the skin in play, is this so bad? And if 30% is a deal killer then what is a historically reasonable down payment?
Robert Cote - the primary things you'd look at are two fold, and they relate to the investment side, and the real demand side. The main variable to track on the investment side is cap rates. In the biz, there were a 1000 justifications for yield compression over the past few years, because people wanted to believe that it made more sense to get 4% on a CRE return when you could get 5% in cash. Turns out, it was another bubble. But, the GDP side of things doesnt care too much about the prices at which office bldgs are sold. However, the amount of them built is very much a matter of the price they will fetch, compared to construction costs, so you have to follow both these. Of course, there is quite a lag to building new structures, based on price, especially when the underlying demand variables dont look so good, as they didnt from about 2000-2003. But since theyve been improving (until recently) youve got two built in lags timed nearly perfectly....major price peaks and better fundamentals (lower vacancy rates and higher rents.) The problem is, and many in the biz forget this, is that you have to look at the underlying substance of the demand. Silicon Valley is a prime example. Vacancies plummeted and rents skyrocketed as venture capital put tons of warm bodies into office space. Problem is, when the financing dries up, so do the jobs. Today's example is Orange County CA. Credit bubble in residential creates job bubble in finance jobs that prop the values of commercial buildings. This is a very important way of understanding the lag between res and non res bldg as it relates to GDP. More if you like later...
My takeaway - if the lending lockup is all about a lack of liquidity which is all about a lack of confidence, and a feedback loop exists in this, then the MLEC is actually counterproductive, as the lack of loss recognition means no one will trust each other and no one will lend.
Seems he understand the liquidity dryup is about confidence, and you cant have confidence without knowing where the bodies are buried. Yet, he doesn't make the link that the MLEC and such only act to further obscure where the losses are hiding. Therefore, it's counterproductive. I think in a similar way, any bailout of soon to be foreclosed "homeowners" falls under the same category of "doomed to fail".
The bottom line is that policy makers left the financial industry free to innovate and what it did was to innovate itself, and the rest of us, into a big, nasty mess.
Its the "REST OF US" thing that gets up my nose. I and probably many reader and contributers to this blog saw this shit coming, have taken evasive action and are somewhere between "sitting pretty" and "will survive by a modest battening down of the hatches". One thing that anybody with a modicum of sense and fiscal responsibility won't be is "up shit creek".
If he'd just let it work itself out... but no such luck - so I and probably quite a few others have to continuously watch out for the twists and turns and navigate ourselves away from the danger these buggers pose to us.
From the WSJ, "Housing to the Fore: Clinton Urges Freeze on Foreclosures":
WASHINGTON -- In a sign that the housing crunch is increasingly resonating on the campaign trail, Sen. Hillary Clinton is expected to call today for a 90-day moratorium on home foreclosures, as well as a five-year freeze on the rates of adjustable mortgages, an idea the Bush administration is already considering.
The Democratic presidential front-runner's move signals a likely priority shift for political candidates, from one dominated by foreign affairs and domestic issues such as health insurance to one that more directly addresses the economic well-being of individual Americans. High oil prices, plummeting home values and an increasingly volatile stock market are making consumers nervous, and a credit crunch has them fretting about their personal liquidity.
Robert Coté, yes, I think there has been too much commercial space built - but not anything like the overbuilding for residential, and also small compared to the '80s CRE bubble.
As the long term readers know, I started the year predicting a turn down in CRE at the end of the year - because of the typical historical pattern of CRE following residential. The turn down now appears to be here.
and to follow-up on that point...sales of limited service hotel has slowed considerably in the 3rd/4th quarter. The CMBS market that fueled much of the activity in 05-06 is frozen. $28 billion in hotel cmbs deals (full and limited service) are backed up. Deals are still getting done, but lender pricing is coming back up.
I am in real estate development. Lending for us has historically been driven by debt coverage ratios which makes the loan based on the ability to cover the debt service. The back-up to this is LTV. Typically we do loans in the 70-75% LTV range.
As aside, I have a couple loans in process right now and, at least here in San Diego, there is still plenty of money floating around for new construction and perm financing at very good rates (ie construction loans are at 170bps over 10-yr Treasury).
p.s.: I asked once before, but it was late in a large comment thread."
Wachovia was the largest. Particularly interesting was the speed at which Wachovia grew, mostly on low quality and high volume. Their conduit deals price WAY outside the rest of the market.
Wachovia was also the leader in CRE CDO structuring.
All the major I-Banks are big lenders in the conduit realm of CRE, which will be the worst hit. Take your pick there. I include people like Wells and Nat City here.
Further up the food chain, in the higher quality properties, insurance companies play a large role.
You can also look at the special servicers and b-piece buyers like Centerline and Lennar.
FWIW i am seeing the following (and i just priced a deal with 7 lenders)
Conduit and CMBS guys - 70% LTV 1.25DCR
local banks 90% LTC 80% LTV 1.15-1.2DCR
life companies 90% LTC 75% LTV 1.25DCR
and yes wachovia is FAR outside but mostly in their 'in house appraised' cap rates and the variety of instruments they offer like a 3 yr ARM or 5 year bullet.
spreads are out to 250bps but with the curve so low that makes little difference these days
and btw, AFASIK, new perm financing only makes sense when there has either been value add or an increase in rental rates since the last placement. this is why the LTV value becomes a cash-out.
its the LTC numbers to watch on the building side that will drive things. and still 90% LTC works out so long as the finished value is 80-75% LTV. and if it aint, then you're in the wrong business doing the wrong thing.
or better said, you're terminal cap rate damn well be lower than your purchase+construction+new lease cap rate.
we buy at a 9.5% or so and refi at a 7%. nice little biz
"My pick is Africa (for time frames of 20 to 40 years)."
Might want to reconsider. Peak Oil virtually guarantees that third world countries will remain exactly that.
tj & the bear,
I'm not really thinking about oil.. I'm just betting against the anglo-saxon world. And, it seems that Africa is the least developed place on the planet.
I figure people can think up something besides oil in the next 40 years, but maybe you're right. It'll just be status quo as far as the eye can see.. or maybe it'll be "We are all 3rd world in the future.".
What were the predictions for the future in 1967?
What were the predictions for the future in 1997?
Don't put all your little eggs (by eggs I am obliquely referring to money) in one basket (I don't literally mean a basket). sprinkle it around..
In terms of the long term 2 places to think about India, for many of the same reasons as Africa, but ahead of the curve there and it is a successful democracy and very pluralistic place, less likely to degenerate into civil wars. Also Brazil, since it is energy independent with cane ethanol.
Geez, CR....I dunno. As I wander around the SF Bay Area, and I see commerical For Lease signs everywhere, and growing.
It's so notable, I've considered wandering around to film it. Last time I recall seeing this many signs, we were already in the dot com bust.
I'm currently watching a building go up right across the street from a building which has been see-through vacant since it was build at the end of the dot com bust. There isn't any way to convince me it's cheaper to build a new one than it is to furnish and lease the existing one....it's some sort of shell game, with a yet to be identified bag holder.
CR,
Do you have any useful suggestions for looking at long term CRE trends and the general economy? Obviously dollar valu or expenditures either compared to GDP won't be useful as the nature of commercial space has changed so very much. Retail space per GDP? Or per retail component of GDP? Mfg + Ofiice space per non consumer GDP?
I guess what I'm looking for by picking your vast and superior brain is whether we got ahead of demand for nonresidential space as we obviously have for housing.
I shall now shut up and listen and learn. TIA.
CR,
If you want to do more research, just compare the amount of retail space per capita in the U.S. today with any other country in any other time period ever. You would be shocked.
Awhile ago, retail chains (stores and restaurants) stopped paying any attention to analysis based on local demographics and buying power per sq ft. They just made a land rush to put as many sq. ft. as possible into play to drive out competition. Only...most of the competition is still there.
First big retailer to dump vast acreage onto the market and go out of biz...Circuit City.
I don't know, Circuit City didn't do too badly in driving Silo out of the market. So the strategy wasn't completely ineffective.
But you're right: and I fear we have a nation of dinosaurs.
It's good to be a small furry mammal in these times, but you still gotta watch out for the falling dinosaur carcasses.
How about SHLD?
Off topic, but pretty hilarious quote from a Japanese "capitalist innovator":
``The worst of subprime-related trouble is mostly behind us, thanks to various efforts by U.S. officials,'' said Ryoji Musha, chief investment officer at Deutsche Securities Inc. in Tokyo.
That's right. Everything was just a bad dream...we can go back to pumping up the markets again.
Ridiculous.
No, SHLD is better diversified by far than CC.
There is no biz that is more vulnerable to recessions than consumer electronics. You get hit by price deflation (e.g., flat-screen TVs) and declining volume at the same time. You can't even liquidate inventory for cost. CC doesn't have the balance sheet to absorb writedowns.
Wanna bet $780 BILLION instead of that wimpy guess.
I bet over 780 by the end of 09!
Any takers on the under? I think that the next damage will be in this sector, followed by credit cards, and finally us govt GSE debt, and then universal default. Worse case scenario of course- this could never happen in the real world, as the fed would start monetizing to stop the panic. Like they already are.
Someday this war's gonna end....
"In the '01 recession, CRE investment was hit pretty hard (unlike residential investment), so there probably isn't the significant excess supply that exists for residential real estate."
I think this time it has more to do with inflated prices. But remember, there is still some heavy CRE building going on.
The UK commercial property market is also showing signs of trouble, and two major CRE funds have recently imposed redemption restrictions on institutional investors (mandatory 90-day notice period).
Is the foundation of commercial property funds crumbling?
"No, SHLD is better diversified by far than CC. "
SHLD is a freaking joke. It's diversified all right, you have a fourth rate retailer combined with a declining department store that's closely tied to home sales. Oh, yes, then you have all the savvy investments, like a big bet on Citi at the end of the summer...
They are some of my most profitable puts and I'm betting they'll double again by spring...
Rich,
That infamous huckster Kunstler has this about retail space:
Clusterfuck Nation by Jim Kunstler : Peak Suburbia
Even the blind squirrel...
I wonder how bad things will be if/when China's commercial property does the same.
Here's a hint of what their residential property looks like.
China's Sub-Subprime Housing
CR- Mish has created several threads on a commercial meltdown. I think Dr Roubini has done some work as well.
I'm making sense of the 'systemic' side of this perfect storm by viewing credit as a toxin. The oversupply after Y2K, and the 0% prime after, was like a carcinogen for the economy. All the big credit consumers are in the process of going belly up, dead but they don't know it yet.
CR,
Who are the big players in CRE lending?
p.s.: I asked once before, but it was late in a large comment thread.
I don't know about most other places, but the Baltimore to Richmond corridor is severely overbuilt commercially. All you have to do is drive around and look at the buildings - not many full parking lots, and leasing signs everywhere. Business that go under or move out of office or retail space don't seem to be replaced by new tenants very quickly.
I think the loss will be closer to $78B than $11B, but AlanM might be right - it's probably going to be $780B.
Hi Fellows:
Chris Thornberg say it is too little too late.
Bloomberg News
Sunday London Times - The gathering storm / Just how bad is the credit crisis? And how bad could it get?
The gathering storm - Times Online
Telegraph UK - Please for rate cut as interbank loans dive. The sterling interbank market has collapsed at the fastest rate in modern history, prompting pleas for immediate rate cuts from a chorus of top British economists. "This is one hell of a shock to the financial system..."
Pleas for rate cut as interbank loans dive - Telegraph
I hate to ask silly questions but since we are all now subprime, how about you humor me. When we all refer to the CRE market, what exactly are we referring to? As I walk around I see large office buildings, malls, retail/office mix, residential retail mix, residential towers, government buildings. What is considered CRE and what isn't?
tj & the bear I think alot of the debt is held by small regional lending institutions. There are several types of debt, short term construction loans, medium term mezzanine, long term take out loans. Long term loans are easily sold, short terms are mostly kept on books. The short term loans are much more vulnerable to loss than final loans are as the income streams are less stable or in the worst case non-existent.
WSJ - Lennar, Morgan Stanley Forge Land Model.. Home builder Lennar Corp. has sold about 11,000 home sites to a venture mostly owned by the real estate arm of Morgan Stanley for $525 million, a large land sale that signals that investors have begun to pounce on bargain deals.
Troubled Builders, Bargain Seekers United - WSJ.com
To me commercial RE includes office/retail/restaurant/hotel/industrial/governmentally leased buildings (not schools, POs, military, etc.).
FFDIC | 12.02.07 - 9:05 pm | #
Doesn't sound too smart to me. Then again, what the hell do I know, I don't even own a house.
[OT] Ben Stein opens a can of whoopass on GS:
<a href="http://www.nytimes.com/2007/12/02/business/02every.html>The Long and Short of It at Goldman Sachs
I am not a huge fan of Stein, but he might be on to something here.
Washington State just passed a property tax relief bill that allows many homeowners to defer up to half of their property taxes. The money owed earns interest to the government. What's the interest rate? ~7% adjustable! As if that wasn't bad enough, an ammendment which "simply required disclosure to homeowners that they would be charged a variable interest rate on their deferred taxes" was apparently rejected.
I offer a tribute in Tanta's honor.
We're All Subprime Now (Musical Tribute)
WSJ's Heard on the Street picks up on the E*Trade deal as a potential mark for the rest of the street:
Citadel May Have Set Template - WSJ.com
Brian | 12.02.07 - 9:21 pm | #
is this a 73% devaluation across the board? Talk about 'contained'.
Nemo,
Thanks for the link to Stein's article. I agree in that I am also not a fan of his. His big point seems to be that Goldman Sachs could be tipping the economy into depression by maximizing its own profits. Whatever.
The shorter version of the first page of his column is as follows:
All his subsequent insights seem to be built upon this brilliant insight...
Nemo,
I found Ben Stein's article rather chilling.
On the one hand, the optimist in him is clearly trying to hold it together
On the other hand, the realist in him is starting to question the shady character of his own investments.
Detriot Dan,
There hasn't been a depression since the depression (which was a long time ago), so a depression is very unlikely.
I always love that reasoning.
We also haven't seen the 1970s since the 1970s, so we've got that going for us too, lol.
sigh
"The commercial property sector is not likely to suffer the huge falls experienced by the worst-hit residential markets ... Supply is near its tightest point in decades."
Dude, pass the bong. That sounds like some awesome weed.
It's good to be a small furry mammal in these times, but you still gotta watch out for the falling dinosaur carcasses.
mal | 12.02.07
This is probably a reference to a great Far Side cartoon of a bunch of dinosaurs making fun of a small furry animal, but the dinosaur on the end has just noticed a first snowflake.
What is "commercial" various a lot with who is asking and who is counting. By one standard it can be anything bigger then a duplex.
Other categories that are often in commercial or not are industrial, and institutional. Most of your financial aggregators include them within commercial work.
One of the better indicators to look for where commercial construction is going is the AIA Architect Billing Index. It is a relative strength index. And is usually about 9 to 12 months ahead of actual construction. From a common sense point of view it is a fairly practical tool. Architects are needed for almost any serious type of building, and they do most of their billing on the front end of a project.
The index went up most recently (October) after 2 down months.
404 Error
Right now is the time of year when there usually is a little slowing down in the construction market anyway. In most areas of the US it is either too cold or too wet (even in the South the ground will stay wet a lot longer after a rain in 40 degree temps).
You are seeing a lot of institutional projects. These are often very large, and have such long lead times they are almost counter-cyclical.
Wachovia is a major player in commercial construction lending. I saw some of their literature from August that indicates that conduit lending is completely seizing up. But that won't particularly effect the institutional work (which is tax revenue based). I think that is where the surge in AIA billing is coming from.
A lot of people in commercial construction are worried. It is getting tighter in some areas, but not at a standstill. My guess is that the mid-size institutional work will dry up at the end of this coming summer. Somewhere during that summer you would expect see many many contractors showing up at every bid, and the over-leverage, or those surviving on cash flow (versus profits) will start to fall very quickly.
Of course with a big implosion coming from the Mega-Residential Builders coming somewhere within that time frame, it may be that nobody notices.
Stagflationary Mark,
Be careful I feel like I am in the way back machine with Sherman and Mr. Peabody lately.
Lets see there is a Bush in the White House,
We are in a war in Iraq.
We are in a recession yes in.
Also we are having a housing downturn.
Pretty damn close to the 1990's huh.
Joke from daddy Bush to current Bush.
Son you made the same mistake in Iraq I made with your mother. You didn't pull out fast enough.
The Ben Stein Sunday NYTimes article had an interesting split personality. The first part was that a GS analyst (Hatzius) had overstated the seriousness of the situation, while the second part called for an investigation of GS simultaneously issuing large amounts of loan-based paper and shorting it. Stein credits a Fortune article for the material in the second part.
Stein suggests that Hatzius' work has helped the short position, but that seems to me a minor aspect of the situation.
Pretty damn close to the 1990's huh.
"Pretty damn close" to 1970 too though.
Mark, I am so bummed. You have all these great links to your homepage but it still bumps me after 2 seconds and says something about "robots.txt" on a Dell search page it takes me to. Oh well.
Stagflationary Mark
great clip and great movie.
I especially liked the part where Mr. Beals...is that his name, is called into the boardroom and told, there is no usa there is no france there is no ussr nor brazil nor china...there is just mobile, exxon, ge, union carbide (and he goes on with the dow 30... (I may have the list wrong but you get it)...
and no pounds, nor yen nor deutchmarks...just petrodollars ?
how prescient of them in the mid 70's
SIV Contagion hits Paypal/Ebay:
economics rebecca gomez goldman trader at economicsbriefing.com
A takedown on the Stein column from the naked capitalism blog:
Ben Stein Takes on Goldman and Loses
[snip]
There's no smoking gun here. This bit refers to third quarter 2007, not 2006 when Goldman was selling the deal in question. Whether Stein likes it or not, it's acceptable to hedge your trading inventory. Now if Stein could find some proof that the firm was net short mortgage risk in 2006 when it was peddling this paper, that would be damning indeed.
[snip]
Finally, we have this priceless bit of analysis:
He [Hatzius] is also postulating that lenders would have to retrench so deeply that lending would stall and growth would falter an event that, again, has not happened on any scale in the postwar world, except when planned by the central bank.
Stein apparently can't locate Japan on the map. Its post-bubble contraction was even worse than what Hatzius forecasts for America, and was most certainly not planned by the Japanese authorities.
[snip]
Pretty damn close to the 1990's huh.
"Pretty damn close" to 1970 too though.
Nah, closer to 1928.
On topic we are clear cutting a forest somewhere to make for lease signs for retail/office space in Colorado Springs. Every single building in this town has at least one vacancy. It is almost surreal to drive around here.
I know after Christmas all hell will break loose as retailers contract to handle their new reality.
I went to the mall this afternoon and the mall was less than 1/2 full. We only have 2 real malls in this town of 1/2 a million so we aren't over served in my opinion. The one thing I bought when I went to pay I was the only one checking out with 6 lanes to choose from.
w,
You might try the following free tools to see if something isn't hijacking your computer. Other than that, I don't know what the problem might be. It is very odd that it keeps taking you to Dell. Very odd indeed.
House Call Free Scan
Ad-Aware 2007 Free
Do you think a banker would rather have an SIV or have HIV?
I went to the mall this afternoon and the mall was less than 1/2 full. We only have 2 real malls in this town of 1/2 a million so we aren't over served in my opinion. The one thing I bought when I went to pay I was the only one checking out with 6 lanes to choose from.
Be a real patriot. Go back and spend more. And if you must, do it one purchase at a time. It'll make the customer count look good. It's good for the economy and it'll keep a few more checkers employed. And,...it'll keep you from wasting your time reading wise-cracking bloggers! It's a win-win!
Long time lurker, first time poster...
I'm a commercial real estate broker representing tenants in downtown San Francisco. Many of us were awestruck by the psf price Blackstone cheerfully shelled out to acquire Equity Office Property s San Francisco portfolio in May of this year. The pro forma for their insane psf purchase price required rental rates to hit around dot.com level rents not only in the marquee buildings like One Market (Waterfront property overlooking the Ferry Building), but the standard Class A and B office buildings in tertiary markets like South of Market (SOMA) and the North Waterfront.
But Blackstone wasn't too concerned as they promptly sold substantial portions of the EOP portfolio to another tranch of bagholders further down the CRE food chain including Morgan Stanley and Beacon Properties. To make their new purchase price make sense, these new owners need to exceed dot.com era rents by a substantial margin. Six months later, none of the asset managers I talk to are anywhere near hitting their numbers and leasing activity is at a standstill.
The only references I see to the CRE market now are eerily similar to the early rumblings in subprime a few months ago. The bag holders for this fiasco will be many and the damage severe.
"California's statewide median price was down $33,720 to $497,110, putting the two-month decline at a remarkable $91,860. The month's supply of home inventories was down slightly from September to 16.3 months, this compares, however, to the year ago 6.4 months."
That is indeed remarkable...
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Stagflationary Mark,
I think you should add a write-in option to your "What Should We Invest In?" poll.. or add other emerging markets.
My pick is Africa (for time frames of 20 to 40 years).
Anecdotally (but maybe one of the experts here could tell me if there is something to this)--whereas in my part of San Diego, the building of housing has noticeably slowed in the last month, as developers seem to have quit working on already leveled tracts, the construction of office and light industrial space seems to be rapidly continuing. I have no idea what businesses will take up this space! I wonder if San Diego will lead in a CRE crash just as it led in the bursting of the housing bubble? Down here in lower SoCal, we're cutting edge, baby!
If there was any doubt that we are in a credit crunch, this would seem to remove all doubt. Can anyone remember banks asking (begging?) clients not to access their credit lines?
CNNMoney.com: 404 Page Not Found
At one point, some loans actually exceeded property values. Now, typical loan-to-value ratios have retreated to about 70 per cent when deals are completed at all.
CR (or anyone else) is 70% a real deal killer? I assume that means the borrower has to put 30% down (where the >100% deals mentioned in the article were CRE equivalents of 'cash back' deals).
And are the deals falling apart from the lender walking or from the borrower balking?
If a developer has to come to the game with 30% of the skin in play, is this so bad? And if 30% is a deal killer then what is a historically reasonable down payment?
Anyone?
My pick is Africa (for time frames of 20 to 40 years).
Might want to reconsider. Peak Oil virtually guarantees that third world countries will remain exactly that.
Robert Cote - the primary things you'd look at are two fold, and they relate to the investment side, and the real demand side. The main variable to track on the investment side is cap rates. In the biz, there were a 1000 justifications for yield compression over the past few years, because people wanted to believe that it made more sense to get 4% on a CRE return when you could get 5% in cash. Turns out, it was another bubble. But, the GDP side of things doesnt care too much about the prices at which office bldgs are sold. However, the amount of them built is very much a matter of the price they will fetch, compared to construction costs, so you have to follow both these. Of course, there is quite a lag to building new structures, based on price, especially when the underlying demand variables dont look so good, as they didnt from about 2000-2003. But since theyve been improving (until recently) youve got two built in lags timed nearly perfectly....major price peaks and better fundamentals (lower vacancy rates and higher rents.) The problem is, and many in the biz forget this, is that you have to look at the underlying substance of the demand. Silicon Valley is a prime example. Vacancies plummeted and rents skyrocketed as venture capital put tons of warm bodies into office space. Problem is, when the financing dries up, so do the jobs. Today's example is Orange County CA. Credit bubble in residential creates job bubble in finance jobs that prop the values of commercial buildings. This is a very important way of understanding the lag between res and non res bldg as it relates to GDP. More if you like later...
re: CRE
I do the shorting game and I've followed VNO down from 115 in early July to 90 now and SLG down from 135 in early July to 104 now.
THAT is an indicator of where the market thinks CRE is headed.
-K
OT, but in regards to the prior thread's discussion on saving vs. spending...
http://www.brookings.edu/views/testimony/bosworth/20060406_tables.pdf
If anyone finds data prior to 1960, please post it.
OT : Krugman's latest
OP-ED COLUMNIST; Innovating Our Way to Financial Crisis - NY Times
My takeaway - if the lending lockup is all about a lack of liquidity which is all about a lack of confidence, and a feedback loop exists in this, then the MLEC is actually counterproductive, as the lack of loss recognition means no one will trust each other and no one will lend.
So, we're doomed?
ack! I think my previous post got dinged. I was doing an OT in the NYT :
Krugman's latest.
OP-ED COLUMNIST; Innovating Our Way to Financial Crisis - NY Times
Seems he understand the liquidity dryup is about confidence, and you cant have confidence without knowing where the bodies are buried. Yet, he doesn't make the link that the MLEC and such only act to further obscure where the losses are hiding. Therefore, it's counterproductive. I think in a similar way, any bailout of soon to be foreclosed "homeowners" falls under the same category of "doomed to fail".
Krugman:
How did things get so opaque? The answer is financial innovation two words that should, from now on, strike fear into investors hearts.
A nice sentiment that gets forgotten every generation.
Doh! Apologies for the dupe. Geoff posted while I was reading the article.
eli,
I should have at least included "other." Maybe I'll be smarter next time though!
================================
re: Krugman
The bottom line is that policy makers left the financial industry free to innovate and what it did was to innovate itself, and the rest of us, into a big, nasty mess.
Its the "REST OF US" thing that gets up my nose. I and probably many reader and contributers to this blog saw this shit coming, have taken evasive action and are somewhere between "sitting pretty" and "will survive by a modest battening down of the hatches". One thing that anybody with a modicum of sense and fiscal responsibility won't be is "up shit creek".
If he'd just let it work itself out... but no such luck - so I and probably quite a few others have to continuously watch out for the twists and turns and navigate ourselves away from the danger these buggers pose to us.
-K
From the WSJ, "Housing to the Fore: Clinton Urges Freeze on Foreclosures":
WASHINGTON -- In a sign that the housing crunch is increasingly resonating on the campaign trail, Sen. Hillary Clinton is expected to call today for a 90-day moratorium on home foreclosures, as well as a five-year freeze on the rates of adjustable mortgages, an idea the Bush administration is already considering.
The Democratic presidential front-runner's move signals a likely priority shift for political candidates, from one dominated by foreign affairs and domestic issues such as health insurance to one that more directly addresses the economic well-being of individual Americans. High oil prices, plummeting home values and an increasingly volatile stock market are making consumers nervous, and a credit crunch has them fretting about their personal liquidity.
Sorry, here's the link to the WSJ article quoted above (it requires a paid subscription, I believe):
Housing to the Fore: Clinton Urges Freeze on Foreclosures - WSJ.com
ShortCourage,
I just love the whole concept of the adjustable rate mortgage rate freeze.
It is yet another form of the ever popular price controls and is the breeding ground of unintended consequences.
Note to self: Never invest in banks, again. The government may step in and freeze their "financially innovative" products, again.
Now all we need is a Debt Embargo to rival the 1973 Oil Embargo and we'll be in business (or out of business, depending on how you look at it).
Stag Mark,
Yeah, I'd be investing in puts on banks for the next couple years.
Robert Coté, yes, I think there has been too much commercial space built - but not anything like the overbuilding for residential, and also small compared to the '80s CRE bubble.
As the long term readers know, I started the year predicting a turn down in CRE at the end of the year - because of the typical historical pattern of CRE following residential. The turn down now appears to be here.
Best to all.
dryfly,
65% LTV is the historical norm for hotels (limited service...e.g. Hampton Inn)...
Not sure about the 4 primary food groups of CRE
and to follow-up on that point...sales of limited service hotel has slowed considerably in the 3rd/4th quarter. The CMBS market that fueled much of the activity in 05-06 is frozen. $28 billion in hotel cmbs deals (full and limited service) are backed up. Deals are still getting done, but lender pricing is coming back up.
dryfly,
I am in real estate development. Lending for us has historically been driven by debt coverage ratios which makes the loan based on the ability to cover the debt service. The back-up to this is LTV. Typically we do loans in the 70-75% LTV range.
As aside, I have a couple loans in process right now and, at least here in San Diego, there is still plenty of money floating around for new construction and perm financing at very good rates (ie construction loans are at 170bps over 10-yr Treasury).
"Who are the big players in CRE lending?
p.s.: I asked once before, but it was late in a large comment thread."
Wachovia was the largest. Particularly interesting was the speed at which Wachovia grew, mostly on low quality and high volume. Their conduit deals price WAY outside the rest of the market.
Wachovia was also the leader in CRE CDO structuring.
All the major I-Banks are big lenders in the conduit realm of CRE, which will be the worst hit. Take your pick there. I include people like Wells and Nat City here.
Further up the food chain, in the higher quality properties, insurance companies play a large role.
You can also look at the special servicers and b-piece buyers like Centerline and Lennar.
FWIW i am seeing the following (and i just priced a deal with 7 lenders)
Conduit and CMBS guys - 70% LTV 1.25DCR
local banks 90% LTC 80% LTV 1.15-1.2DCR
life companies 90% LTC 75% LTV 1.25DCR
and yes wachovia is FAR outside but mostly in their 'in house appraised' cap rates and the variety of instruments they offer like a 3 yr ARM or 5 year bullet.
spreads are out to 250bps but with the curve so low that makes little difference these days
and btw, AFASIK, new perm financing only makes sense when there has either been value add or an increase in rental rates since the last placement. this is why the LTV value becomes a cash-out.
its the LTC numbers to watch on the building side that will drive things. and still 90% LTC works out so long as the finished value is 80-75% LTV. and if it aint, then you're in the wrong business doing the wrong thing.
or better said, you're terminal cap rate damn well be lower than your purchase+construction+new lease cap rate.
we buy at a 9.5% or so and refi at a 7%. nice little biz
"My pick is Africa (for time frames of 20 to 40 years)."
Might want to reconsider. Peak Oil virtually guarantees that third world countries will remain exactly that.
tj & the bear,
I'm not really thinking about oil.. I'm just betting against the anglo-saxon world. And, it seems that Africa is the least developed place on the planet.
I figure people can think up something besides oil in the next 40 years, but maybe you're right. It'll just be status quo as far as the eye can see.. or maybe it'll be "We are all 3rd world in the future.".
What were the predictions for the future in 1967?
What were the predictions for the future in 1997?
Don't put all your little eggs (by eggs I am obliquely referring to money) in one basket (I don't literally mean a basket). sprinkle it around..
In terms of the long term 2 places to think about India, for many of the same reasons as Africa, but ahead of the curve there and it is a successful democracy and very pluralistic place, less likely to degenerate into civil wars. Also Brazil, since it is energy independent with cane ethanol.
dc1000, IQ16?
huh?
Geez, CR....I dunno. As I wander around the SF Bay Area, and I see commerical For Lease signs everywhere, and growing.
It's so notable, I've considered wandering around to film it. Last time I recall seeing this many signs, we were already in the dot com bust.
I'm currently watching a building go up right across the street from a building which has been see-through vacant since it was build at the end of the dot com bust. There isn't any way to convince me it's cheaper to build a new one than it is to furnish and lease the existing one....it's some sort of shell game, with a yet to be identified bag holder.