I don't know if you really want to be aligning yourself with Berner. I've been reading him & Roach for 4 years running, and Berner's been consistently over-optimistic every step of the way.
Tell that to my buddy who owns one of the prime shopping centers in SW Florida who has had 20% of his tenants either give notice or simply vacate within the last sixty days.
For the last 25 years, the center never had more than a 5% vacancy rate.
It will be interesting to see what the next sixty days brings.
Second first comment. Brenner waved off the depth of the housing bust and didn't give any chance to a recession - not all that more than a year ago. He's a perpetual positive kind of guy.
--
"This is similar to my view that the CRE bust is here, but that it will not be as bad as the residential bust - simply because CRE wasn't as overbuilt as residential."
We shall see, CR. I am sure that you discount less demand for retail space as Internet commerce takes on greater and greater % of business. Lot of mall owners will go bankrupt. Once the consumer credit and home finance business goes into bust it will do wonders for the CRE? How about hospitality and leisure??
It is the Consumer Spending, Stupid! (That drove the CRE and will take it down big).
The thing about CRE is it's really been a global boom. London, Hong Kong, Singapore, Dublin, all over China...
You don't have to assume the worlds coming to an end to foresee the boom ending. The Olympics may be the global watershed. China has been building all sorts of infrastructure for that.
I plan on loading up on steel index puts a little later.
i think there are two issues with the cre story. the first is the contribution to marginal economic growth, which berner is speaking to. the impact will probably be larger than he predicts as commercial dampened the negative feedback loop coming from residential. the second issue is with respect to balance sheet carrying values of lenders, which berner's analysis is largely silent about. there will be writedowns to come in this sector as well. it will not be as systematic or as large as the residential writedowns, but the ability to absorb will be challenging as this will be mostly a synchronized downturn in credit.
CR,
Respectfully, I see you producing clear, cogent arguments backed by facts and reasoned analysis as to why you believe residential real estate will revert towards the mean of the 1999-2001 era but it seems that you aren't applying the same methods to CRE. If I were to bet I'd lay down heavy on your line rather than mine but could you explain why one and not the other or if I am missing some other aspect?
Something else to think about. In the run up of residential RE lots of rezoning artificially constrained CRE supply as unincorporated and R&D/Light Industrial zoned land was paved with housing. IMO this was part of the unprecedented decline in cap rates due to competition from RRE for raw land availablity. With the overhang of RRE we both agree is going to persist for years don't you think it possible for a re-rezoning trend could further depress existing properties' ability to retain value while carrying their high land costs? The secondary effect of this may very well be municipalities nationwide following California's lead in "zoning for dollars." That could strand lots of CRE with high operating costs and a new supply of low priced competition.
My livelihood depends on commercial, retail,industrial and public non-residential construction in MN and region.
From that vantage point, CRE is falling over. It will be deep. It will be long-lasting.
Next to fall will be public construction. The public projects are designed to take advantage of the increase in RE values from 2005/2006/2007 without recognition of current events (natural demand/design/construction lag). The public bodies have no idea yet how badly their revenure will fall below expectations.
Between that and bond issues, the public construction field will be next to tank.
Add to that the 30% rolled steel price increase announced by Japan's mills today, and its just a fabulous time to be a steel fabricator.
I don't know which is better or worse--no sizable backlog and no hit from runaway prices, or big backlog with runaway prices.
C.A.R. reports sales decrease 29.8 percent, median home price falls 21.9 percent
LOS ANGELES (Feb. 25) Home sales decreased 29.8 percent in January in California compared with the same period a year ago, while the median price of an existing home fell 21.9 percent, the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) reported today.
CRE bust is here, but that it will not be as bad as the residential bust - simply because CRE wasn't as overbuilt as residential.
I agree with your conclusion, CR, but I think it goes beyond your 'simple lack of overbuilding' point. I think an even greater factor is that there is simply much, much less collateral risk over on the CRE side. The LTV ratios in commercial are rarely over 70, whereas in resi, they got to be all very high, all the time.
Also, there's a lot more scrutiny in terms of the deals themselves - heck, there's even real underwriting involved - imagine that! Which in turn keeps fraud at bay. It's just a a world of difference compared to where the res side went.
"Second first comment. Brenner waved off the depth of the housing bust and didn't give any chance to a recession - not all that more than a year ago. He's a perpetual positive kind of guy."
If you want a real laugh, read this dialogue between Berner and Stephen Roach from 2006:
Roach is concerned about the effect of declining MEW withdrawal on the economy if anything happens to housing. Berner just laughs it off, says housing is not going to be the driver for the next recession. Which isn't going to happen anyway....
"Roach is concerned about the effect of declining MEW withdrawal on the economy if anything happens to housing. Berner just laughs it off, says housing is not going to be the driver for the next recession. Which isn't going to happen anyway...."
Yea, I remember very well reading the debate you link to above.
After reading Brenner for over two years, I gave up on the guy. How he has any credibility still, I don't know. Seems to me someone in his position ought to have a proven record of forecasting, at least to a degree, or the validity of his analysis would be in doubt. But that requires accountability . . . by examining the record. Guess it just doesn't happen, so he still gets the press.
That CAR release is pretty stunning. I can't belive they had the guts to report a 21% fall in the median right there in the headline.
This part is equally amazing:
-C.A.R.s Unsold Inventory Index for existing, single-family detached homes in January 2008 was 16.8 months, compared with 7.6 months for the same period a year ago.
Richard Berner is Larry Kudlow's evil twin. I suspected he intentionally presented an upbeat economic forecast to balance the ol'Perma Bear Stephen Roach back in the days. He seems to be more balanced since Roach went East but that observation is based on a small sample size.
Could lack of non-conforming jumbo loans account for the price decline in Ca?
Not to worry, CRE will not be so bad in CA. I am sure that all the home modernization business that was booming in LA Area (probably, all over) will not affect CRE. The home modernization boom was much bigger than the RRE construction boom.
So, yes, with few jumbo loans being available sales below the median increased relative to the total population of the sales. What would be interesting to see tracked over time is some kind of scatter chart of individual sales. Maybe the kind with bubbles indicating the relative percentage of all sales at each price point.
--
"More sales below than above the previous median."
The series that track PPSF are looking bad for all CA metros. They are delayed 2-3 months due to methodology. Case-Shiller and Radar Logic reports in late April should confirm the stunning decline in CA home prices.
Could lack of non-conforming jumbo loans account for the price decline in Ca?
No, the lack of people actually qualifying for jumbo loans.
Exactly. These people seem to think that if the interest rates on jumbos and conforming loans were the same, then the market in CA would magically improve. It's not the interest rate spread that's the problem... it's the new underwriting standards.
In the areas in LA county where there are rich people who can easily qualify for jumbos (Manhattan Beach, Redondo Beach, etc) prices are not trending nearly as bad as the rest of the state.
Neal writes:
...Next to fall will be public construction. The public projects are designed to take advantage of the increase in RE values from 2005/2006/2007 without recognition of current events (natural demand/design/construction lag).
Neal, by that you mean they were just spending the money because it was there, via increase property tax assessments, etc.?
Another area with tons of building is higher education. It really kills me how few people in these spheres thought, "Gee, construction prices are ridiculous and rising fast. Let's wait a year or two, until the boom wears thin and prices fall a little." Nope. Full steam ahead.
I live in an area that's "recession-proof", lots of colleges, a couple hospitals, etc. But there has definitely been a construction boom here. The biggest coming at UMass, and now the state is facing a budget crunch (like every other state.)
And I can't help but think a fall in MEW is going to hit higher education. They've been raising tuition like there's no tomorrow the last few years and it seems to have had no effect on applications. That's one of the few things I would consider a reasonable use of MEW, your child's future.
The problem isn't just fewer people qualifying for jumbo and jumbo rates being higher.
Its seller failing to price their homes to account for jumbo interest rates being higher.
Folks forget that higher intrest rates make their house worth less.
--
"In the areas in LA county where there are rich people who can easily qualify for jumbos (Manhattan Beach, Redondo Beach, etc) prices are not trending nearly as bad as the rest of the state."
True, but the prices are trending down even in the 5% zip codes in CA that were previously immune. The 95% beats the trend in 5% every day. CA is full of areas with 20-40% declines from the peak. They are the ones dragging the median down.
Great, so does that mean they'll replace the baby grand piano with a mariachi band?
My better half loves Nordstrom since the service really is topnotch. We'll see how long that continues...
and by the way, I'm not showing this thread to her so there are no ideas about helping those poor folks out.
More Nordstroms-
Girlfriend is HR mgr for large flagship store in SF-
800 employees-Job cutbacks coming..Meeting today on it..She's had to reduce staff already in her dept. BTW-She says finding good help is next to impossible these days. Had to fire 2 employees recently for not calling in at all. They came in saying they were sick..Gone that day!
So simple to call in sick..Entitled masses are growing stupider by the minute..
Great, so does that mean they'll replace the baby grand piano with a mariachi band?
If they do that and offer up good salsa & cervesas I might even shop there once in a while...
BTW - they've already dumped the piano in a lot of stores, not young-modern enough... supposedly opting for electronica mood thump music instead. That'll get those blue hairs popping out the credit cards... or maybe not.
My wife & I were in a metro mall this weekend & were discussing this (music, marketing and Nordstrom's). We came to the conclusion no matter how much electronica the pump out - my twenty somethings won't shop there until its as cheap (and I don't just mean inexpensive) as the trend stores they shop. Nordstroms will have to wait for (1) these kids to grow up and (2) make some real money.
Let us see which one goes bankrupt first. Half the chains will, but that shouldn't affect CRE because it is not as overbuilt as Kudlow's ass, or Cramer's mouth.
Locally in Tehachapi, CA, we have added 25-30% to CRE, 15-20% to RRE, and some 5% to households over the past 4.75 years that I have lived here. Something is gotta give. The boom in people moving here hasn't, and will not, materialize.
Bubble mentality is very common among builders and business people, no?
Maybe I have been misunderstanding your argument - are you saying the drop in the Commercial Construction contribution to GDP won't be as bad as the drop in Residential Construction?
I think many of us have been looking at this from the investor/lender perspective rather than the employment perspective. I believe investors in CRE are going to lose at least as much on average as homeowners, but you're probably right that some degree of construction employment will continue.
Much of what has been built recently won't be very adaptable for new uses, Government stimulus is likely to go in this general direction, and maybe there will even be a need for new factories if the dollar falls low enough. Plus Residential Construction is going to drop to almost nothing, so it won't be hard for Commercial to beat Residential by that measure.
all this discussion raises (but does not beg) the question; what is a reasonable rent for commercial real estate?
Locally, the two strip malls that finished exteriors last year remain unoccupied except for a hair saloon and a payday loan store.
Walmart put up a sign announcing their new store at my end of the valley early last year; two streets were realigned, some power and phone lines rerouted, water and sewer installed to the edge of the property, but no store yet. Seems like atypical behaviour for Wally world.
--
Ah, found CRs blind spot (my specialty ) on CRE!
Several massive high-rise condo projects planned for the area have been either halted or delayed. Add to that halting expectations for weakening retail sales. Downtown has struggled to find retailers along its Pine Avenue artery and at downtown developments like the Pike at Rainbow Harbor and CityPlace. "We're rather pessimistic on retail," Kyser said. "And that spells tough times for downtown Long Beach. To survive you need retail."
THERE WERE MANY MANY PROJECTS THAT WERE JOINT RESIDENTIAL & COMMERCIAL DEVELOPMENTS. There was one huge project north of Palm Springs that I believe opened up already (I read about it in a local paper during a stay three years ago).
I agree, Gary.... "It's sort of Three's Company meets Aadams Family, Meets Survivor, meets Wall St." ..
Sara Silverstein as Tanta - Stephen Colbert as CR himself - Jas played by Daniel Day Lewis from There Will Be Blood - O-Joe played by Drew Carrey - Sebastian played by William Macy from Fargo - MP played by Christopher Lloyd - Conjure Bag will of course play himself.
Fight sequences choreographed by Yuen-Woo Ping.
That's my pitch. Can I haz development money?
Here's my anecdotal addition to the CRE meltdown. I think it was the Irvine Company who just built a whole slew of 2 story office buildings at Jeffrey & the 5, just down the street from me. I drive by all the time and I only see one tenant so far in what I believe is 16-20 buildings.
He certainly has history on his side: in the '29-'33 depression, RRE fell 85%. CRE, indeed, did better; it only fell 80%.
Where can that actual info be found? Also, if someone can help me out, I read that no other asset class has out returned the stock market over 20 years according to Jim cramer, and I was wondering if that is true.
CR,
I don't think you are going to win this debate without some solid supporting facts. So, I'm afraid you are not going to win this debate. That is okay, if you knew everything, you'd be Jas. Nobody wants to be Jas.
Let's try not to be ironic about things. Of course past is not a guarantee of future, but it is a damn good indicator. If you are short stocks, maybe that is why you are having this reaction?
Simply, I am asking if during any 20 year period if the stock market has outperformed any other asset class. Ceretainly, real estate market is going to go down, so is the stock market in my opinion over ther short term--that is more of a long term question. I am interested in real estate and the stock market and trying to pick which business to get in to. If the stock market truly performs better than the re market over thee long term, and over all 20 year periods, that influences my decision. Try not to judge that that is smart or not because you don't know my entire situation. Thanks if you have any info on that.
Also, remember there are foreign markets. I certainly hope your not saying that all markets are shams over the long run.
CR, You have no clue about CRE, if you think the decline will be shallow. Just one clue - people like Sam Zell do not sell their lifetime business on a dime.
The slowdown and the eventual collapse of CRE will kill the local banks... They hold the paper! They were able to pass off the Residental crap to Wall Street and they thought hey...lets do more CRE better return so they thought.
The number of vacancies on our main retail strip in town has definitely increased. Interestingly, it's been a few locally owned retailers, and some national brand stores (think Sprint, Pier One, Pep Boys, Jamba Juice, etc.) Interestingly, I am not seeing many new tenants coming in to fill the empty space, though there are a couple (there's an Apple Store coming). It's been entertaining to watch the bubble pop on some of the smaller higher end, aspirational, places over the past few months.
Thanks for the link and info! I thought you were talking about actual values as opposed to GDP. GDP would be something akin to value produced that year right, not actual value. This was real intersting to me because I did some research a year ago or something and recalled actaul stock values in depression dropped around 90% as i recall from peak to bottom--I wonder how much the actual value of rre and cre went down during that same time.
One of the ugly parts of commercial is older buildings that can't be sold as is. Wrong materials, outdated or illegal safety, out of spec for current code, unrepairable handicap access issues, you name it.
I'm seeing the few buildings that make it to "sold" require gutting and complete reconstruction. Not much point anymore, when business success is so iffy. On top of that, you can inherit toxic issues and become good friends with EPA. The smart guys just build new, in some place where NOBODY has been.
With the credit crunch, the "new build" option goes away, and no one can afford to update an older building (especially for retail).
I posted this late on an earlier CR CRE blog item. Its pretty clear that the "overbuild" equation is about to change dramatically during 2008. This indicates to me that 32 mill sq ft of CRE ABOVE the 2000-2006 average has/is hitting the market just as the economy hits what will undoubtedly be a deep and not so short recession. I think CRE is headed way down and the bottom can take care of itself for now. To make money that's all I need to know;
Commercial Builder Woes: What if Theres No Tenant at the End of the Rainbow?
"Some 145 million square feet of new retail space was built in the top 54 markets last year, with another 123 million square feet in the pipeline this year, according to Property & Portfolio Research. By comparison, the annual average between 2000 and 2006 was 118 million square feet."
couple reasons i do not think the cre blowup will be worse than say 1986ish vintage loans. let alone the current resi blow up.
--derivative markets. some good and bad with this space,..but there is little doubt that the result was an extremely rapid repricing of risk in cre forcing lenders to tighten up, even in the face of strong loan performance.
-current levels on derivatives and bonds related to cre have more to do with technicals than they do real implied value. i see it everyday from my seat, the depth of these markets buy or sell is as thin as it gets, just even hint at buying or selling and you move the markets. and the amount of people being forced to sell bonds, or buy hedges at any price far out numbers of true value investors. i wouldnt call that a market that is efficient enough to predict anything from.
-delinquencies in CMBS today are still very low historically.
-borrowers have far more cash today than they did back back then.
-regarding the overbuilt discussion. we are nowhere near the levels of the mid/late 80s. we are at moderate levels, and with lending drying up over the past year, the current level will drop even more.
-equity markets are still holding up. if they fall apart (not saying they wont, but i am 100% sure they are more efficient then evidence such as "my brother owns a building in bakersfield and...) then maybe you will have the tenant disaster you forsee. So if you are looking to profit from your prediction, there are many opportunities to short certain equities.
-maturing loans, not many in 2008 from what i can tell, and many of the ones that do mature, are performing well enough to be able to get a refi.
-GE Building,..3 bidders north of $3Billion. stupid? maybe, but there is a line of proven investors ahead of you if you want to play.
-cap rates, will back up some, but if you think they are going back to the mid nineties you could be waiting a long time. i dont see loan coupons remaining high enough to cause it. coupons are high today only temporarily, they will drop once prices do
my analysis does show prices dropping potentially as much as 20-25%, peak to valley in the next few years due to tighter underwriting, higher cap rates, rates on loans, downward pressure on rents, etc. prices also dropped similarly in the late 80's, but some of the drivers of actual losses that were in place back then are far less today.
so will losses be higher than the past 10 years in cre...sure, very possible. but a disaster anywhere near the resi situation? unlikely. But i would be very careful if you plan on putting your hard earned money to working shorting it. it may take more time and money than you have to realize a gain as the losses may not show up for a while if at all. shorting these markets today is like flipping houses in 2005/2006. you may not want to be left holding the bag when the merry go round ends.
btw, a little background on myself, i have been a california housing bear since 2002,..and unlike the UCLA guys, i stuck to my belief over the years and continued to look stupid calling it. so i dont think i am exactly overly optimistic, but a solid case could be made that i have bad timing.
CR,
I don't know if you really want to be aligning yourself with Berner. I've been reading him & Roach for 4 years running, and Berner's been consistently over-optimistic every step of the way.
Tell that to my buddy who owns one of the prime shopping centers in SW Florida who has had 20% of his tenants either give notice or simply vacate within the last sixty days.
For the last 25 years, the center never had more than a 5% vacancy rate.
It will be interesting to see what the next sixty days brings.
chickenlittle, payment defaults from vacating tenants?
Second first comment. Brenner waved off the depth of the housing bust and didn't give any chance to a recession - not all that more than a year ago. He's a perpetual positive kind of guy.
--
"This is similar to my view that the CRE bust is here, but that it will not be as bad as the residential bust - simply because CRE wasn't as overbuilt as residential."
We shall see, CR. I am sure that you discount less demand for retail space as Internet commerce takes on greater and greater % of business. Lot of mall owners will go bankrupt. Once the consumer credit and home finance business goes into bust it will do wonders for the CRE? How about hospitality and leisure??
It is the Consumer Spending, Stupid! (That drove the CRE and will take it down big).
Jas
CR should cocentrate on local numbers in Fl/CA where slowdown will rival residential.
gary,
yes.
I am not in agreement with CR on CRE will not be as bad. I feel we are extreamly over built and there is no moral hazard like residential.
Check out the YouTube video over on Irvine Housing Blog - Halarious
The thing about CRE is it's really been a global boom. London, Hong Kong, Singapore, Dublin, all over China...
You don't have to assume the worlds coming to an end to foresee the boom ending. The Olympics may be the global watershed. China has been building all sorts of infrastructure for that.
I plan on loading up on steel index puts a little later.
It's gonna be a quicker, sharper decline than Residential, but perhaps not as bad overall because it is not as overbuilt.
i think there are two issues with the cre story. the first is the contribution to marginal economic growth, which berner is speaking to. the impact will probably be larger than he predicts as commercial dampened the negative feedback loop coming from residential. the second issue is with respect to balance sheet carrying values of lenders, which berner's analysis is largely silent about. there will be writedowns to come in this sector as well. it will not be as systematic or as large as the residential writedowns, but the ability to absorb will be challenging as this will be mostly a synchronized downturn in credit.
CR,
Respectfully, I see you producing clear, cogent arguments backed by facts and reasoned analysis as to why you believe residential real estate will revert towards the mean of the 1999-2001 era but it seems that you aren't applying the same methods to CRE. If I were to bet I'd lay down heavy on your line rather than mine but could you explain why one and not the other or if I am missing some other aspect?
Something else to think about. In the run up of residential RE lots of rezoning artificially constrained CRE supply as unincorporated and R&D/Light Industrial zoned land was paved with housing. IMO this was part of the unprecedented decline in cap rates due to competition from RRE for raw land availablity. With the overhang of RRE we both agree is going to persist for years don't you think it possible for a re-rezoning trend could further depress existing properties' ability to retain value while carrying their high land costs? The secondary effect of this may very well be municipalities nationwide following California's lead in "zoning for dollars." That could strand lots of CRE with high operating costs and a new supply of low priced competition.
My livelihood depends on commercial, retail,industrial and public non-residential construction in MN and region.
From that vantage point, CRE is falling over. It will be deep. It will be long-lasting.
Next to fall will be public construction. The public projects are designed to take advantage of the increase in RE values from 2005/2006/2007 without recognition of current events (natural demand/design/construction lag). The public bodies have no idea yet how badly their revenure will fall below expectations.
Between that and bond issues, the public construction field will be next to tank.
Add to that the 30% rolled steel price increase announced by Japan's mills today, and its just a fabulous time to be a steel fabricator.
I don't know which is better or worse--no sizable backlog and no hit from runaway prices, or big backlog with runaway prices.
By the way, has anyone in the preceeding few months been proven right by the limited nature of the problems?
So it is with CRE.
Steep, deep, long.
--
News and my commentary...
CA Resale SFH Prices Down 28% from the Peak 9 Months Ago and 21.9%, YoY
Current Median price = $430,370
9 Months Ago = $597,640
Year Ago = $551220
Jas
-x-x-x-x-x-x-x-x-x-x-x-
Page Not Found!
For release:
Monday, Feb. 25, 2008
C.A.R. reports sales decrease 29.8 percent, median home price falls 21.9 percent
LOS ANGELES (Feb. 25) Home sales decreased 29.8 percent in January in California compared with the same period a year ago, while the median price of an existing home fell 21.9 percent, the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) reported today.
CRE bust is here, but that it will not be as bad as the residential bust - simply because CRE wasn't as overbuilt as residential.
I agree with your conclusion, CR, but I think it goes beyond your 'simple lack of overbuilding' point. I think an even greater factor is that there is simply much, much less collateral risk over on the CRE side. The LTV ratios in commercial are rarely over 70, whereas in resi, they got to be all very high, all the time.
Also, there's a lot more scrutiny in terms of the deals themselves - heck, there's even real underwriting involved - imagine that! Which in turn keeps fraud at bay. It's just a a world of difference compared to where the res side went.
"Second first comment. Brenner waved off the depth of the housing bust and didn't give any chance to a recession - not all that more than a year ago. He's a perpetual positive kind of guy."
If you want a real laugh, read this dialogue between Berner and Stephen Roach from 2006:
Morgan Stanley - Global Economic Forum
Roach is concerned about the effect of declining MEW withdrawal on the economy if anything happens to housing. Berner just laughs it off, says housing is not going to be the driver for the next recession. Which isn't going to happen anyway....
Despite these hurdles, we think that the contraction in outlays will be shallow by historical comparison.
Unless we have an unusually deep recession.
I think the key here is whether we have an exceptionally severe crunch in consumer credit, not whether we have a serious downturn in CRE.
--
Breaking news... Nordstrom disappoints.
Not too good for CRE when even the high-end, that were doing well, are not doing well.
Jas
The other thing working against CRE is the size of items is getting smaller. The only items I know of that are getting bigger are TV sets and pants.
1375
like someone programmed it...
INO Futures and Commodities - Indexes - S&P 500 INDEX (E-MINI) Dec 2009 (E) (CME:ES.Z09.E) Price Chart and Quote
--
"...but perhaps not as bad overall because it is not as overbuilt."
Not overbuilt relative to what? Relative to 1999-2000 when the economy was booming and unemployment rate was multi-decade low?
How about relative to the future demand, especially, if there were a severe recession or depression?
Oh, the depressions have been outlawed because the Fed is so smart? LOL!
Check out the facts: CRE in Silly.con Valley did far worse during 2001-03 than RRE.
Jas
Bob Dobbs said:
"Roach is concerned about the effect of declining MEW withdrawal on the economy if anything happens to housing. Berner just laughs it off, says housing is not going to be the driver for the next recession. Which isn't going to happen anyway...."
Yea, I remember very well reading the debate you link to above.
After reading Brenner for over two years, I gave up on the guy. How he has any credibility still, I don't know. Seems to me someone in his position ought to have a proven record of forecasting, at least to a degree, or the validity of his analysis would be in doubt. But that requires accountability . . . by examining the record. Guess it just doesn't happen, so he still gets the press.
to shnaps 2:25
The LTV that matters in a recession is the rating-agency stressed LTV. Those were routinely at or over 100 for deals done in 2006.
to ac 4:38
A crunch in consumer credit implies a serious downturn in retail, and doesn't bode well for the multifamily sector either.
Jas
That CAR release is pretty stunning. I can't belive they had the guts to report a 21% fall in the median right there in the headline.
This part is equally amazing:
-C.A.R.s Unsold Inventory Index for existing, single-family detached homes in January 2008 was 16.8 months, compared with 7.6 months for the same period a year ago.
Richard Berner is Larry Kudlow's evil twin. I suspected he intentionally presented an upbeat economic forecast to balance the ol'Perma Bear Stephen Roach back in the days. He seems to be more balanced since Roach went East but that observation is based on a small sample size.
Could lack of non-conforming jumbo loans account for the price decline in Ca?
Jim
No big deal. S&P will give CRE a "AAA" rating and everything will keep steamrolling ahead........
Could lack of non-conforming jumbo loans account for the price decline in Ca?
No, the lack of people actually qualifying for jumbo loans.
Russ (4:45p)
and bras. (to hold silicone paid for by MEW)
--
"That CAR release is pretty stunning."
hopeinsd,
It stunned me!
Yes, the inventory is UGLY.
Not to worry, CRE will not be so bad in CA. I am sure that all the home modernization business that was booming in LA Area (probably, all over) will not affect CRE. The home modernization boom was much bigger than the RRE construction boom.
Jas
How do you drag down the median price?
More sales below than above the previous median.
So, yes, with few jumbo loans being available sales below the median increased relative to the total population of the sales. What would be interesting to see tracked over time is some kind of scatter chart of individual sales. Maybe the kind with bubbles indicating the relative percentage of all sales at each price point.
This is only anecdotal, admittedly, but it does seem to me that things are deteriorating quickly in my area with:
storefronts being vacated by retail going out of business;
offices giving notice of non-renewal or early exit due to consolidation; and
single user industrial lease not getting signed due to corporate stall.
Since the sun is shining I'll try to be optimistic and say maybe we'll find a bottom quicker at this rate.
--
"More sales below than above the previous median."
The series that track PPSF are looking bad for all CA metros. They are delayed 2-3 months due to methodology. Case-Shiller and Radar Logic reports in late April should confirm the stunning decline in CA home prices.
Jas
Could lack of non-conforming jumbo loans account for the price decline in Ca?
No, the lack of people actually qualifying for jumbo loans.
Exactly. These people seem to think that if the interest rates on jumbos and conforming loans were the same, then the market in CA would magically improve. It's not the interest rate spread that's the problem... it's the new underwriting standards.
In the areas in LA county where there are rich people who can easily qualify for jumbos (Manhattan Beach, Redondo Beach, etc) prices are not trending nearly as bad as the rest of the state.
Girlbear, you owe me a keybord. There's wine all over it!
tj & the bear, I'm not agreeing with him - other than that I don't think the CRE bust will be as bad as residential.
I'm more bearish on CRE than Brener, so maybe take this as a post about even the bulls being bearish on CRE!
Best Wishes.
Neal writes:
...Next to fall will be public construction. The public projects are designed to take advantage of the increase in RE values from 2005/2006/2007 without recognition of current events (natural demand/design/construction lag).
Neal, by that you mean they were just spending the money because it was there, via increase property tax assessments, etc.?
Another area with tons of building is higher education. It really kills me how few people in these spheres thought, "Gee, construction prices are ridiculous and rising fast. Let's wait a year or two, until the boom wears thin and prices fall a little." Nope. Full steam ahead.
I live in an area that's "recession-proof", lots of colleges, a couple hospitals, etc. But there has definitely been a construction boom here. The biggest coming at UMass, and now the state is facing a budget crunch (like every other state.)
And I can't help but think a fall in MEW is going to hit higher education. They've been raising tuition like there's no tomorrow the last few years and it seems to have had no effect on applications. That's one of the few things I would consider a reasonable use of MEW, your child's future.
My livelihood depends on commercial, retail,industrial and public non-residential construction in MN and region.
From that vantage point, CRE is falling over. It will be deep. It will be long-lasting.
The poster child for that in Minnie can be seen up by the Maple Grove I694/494/94 fork.
The problem isn't just fewer people qualifying for jumbo and jumbo rates being higher.
Its seller failing to price their homes to account for jumbo interest rates being higher.
Folks forget that higher intrest rates make their house worth less.
Breaking news... Nordstrom disappoints.
Nordstrom's... its the new K-Mart.
Could lack of non-conforming jumbo loans account for the price decline in Ca?
Not entirely by any stretch.
There are areas with a median well within conforming limits in January 2007 that have price declines over the 22% statewide, namely:
High Desert (26%),
Riverside/San Bernardino (25%), Sacramento (28%), and
North Santa Barbara County [?!?] (30%).
--
"In the areas in LA county where there are rich people who can easily qualify for jumbos (Manhattan Beach, Redondo Beach, etc) prices are not trending nearly as bad as the rest of the state."
True, but the prices are trending down even in the 5% zip codes in CA that were previously immune. The 95% beats the trend in 5% every day. CA is full of areas with 20-40% declines from the peak. They are the ones dragging the median down.
Jas
I'm pitching a reality TV show where CR and Tanta live in a house, Real World style, with JJ, O-Joe, SIV, and Sebastian.
mp and Conjure Bag live next door behind a fence, like the neighbor on Home Improvement.
I think it's a winner.
Dryfly @ 5:35 -
"Nordstorm's...it's the new Kmart."
Great, so does that mean they'll replace the baby grand piano with a mariachi band?
My better half loves Nordstrom since the service really is topnotch. We'll see how long that continues...
and by the way, I'm not showing this thread to her so there are no ideas about helping those poor folks out.
--
Gary,
JJ (if that is reference to me) is unavailable even for a million bucks.
In a house with Seb and Tanta? That is unconstitutional (cruel and unusual punishment).
Jas
I'm seeing more CRE sitting empty in my trips around the Valley and Ventura.
Obviously anecdotal. But in some parts of Ventura Blvd, the number of RRE businesses was huge.
Cheers,
More Nordstroms-
Girlfriend is HR mgr for large flagship store in SF-
800 employees-Job cutbacks coming..Meeting today on it..She's had to reduce staff already in her dept. BTW-She says finding good help is next to impossible these days. Had to fire 2 employees recently for not calling in at all. They came in saying they were sick..Gone that day!
So simple to call in sick..Entitled masses are growing stupider by the minute..
Great, so does that mean they'll replace the baby grand piano with a mariachi band?
If they do that and offer up good salsa & cervesas I might even shop there once in a while...
BTW - they've already dumped the piano in a lot of stores, not young-modern enough... supposedly opting for electronica mood thump music instead. That'll get those blue hairs popping out the credit cards... or maybe not.
My wife & I were in a metro mall this weekend & were discussing this (music, marketing and Nordstrom's). We came to the conclusion no matter how much electronica the pump out - my twenty somethings won't shop there until its as cheap (and I don't just mean inexpensive) as the trend stores they shop. Nordstroms will have to wait for (1) these kids to grow up and (2) make some real money.
Be a while.
--
"Nordstrom's... its the new K-Mart."
Let us see which one goes bankrupt first. Half the chains will, but that shouldn't affect CRE because it is not as overbuilt as Kudlow's ass, or Cramer's mouth.
Jas
--
Misean,
Locally in Tehachapi, CA, we have added 25-30% to CRE, 15-20% to RRE, and some 5% to households over the past 4.75 years that I have lived here. Something is gotta give. The boom in people moving here hasn't, and will not, materialize.
Bubble mentality is very common among builders and business people, no?
Jas
In Tehachapi?? Ouch.
Cheers,
Yun 2007: But this year is still shaping up to be the fifth best year on record.
Yun 2008: But this year is still shaping up to be only the fifth worst year on record.
CR:
Maybe I have been misunderstanding your argument - are you saying the drop in the Commercial Construction contribution to GDP won't be as bad as the drop in Residential Construction?
I think many of us have been looking at this from the investor/lender perspective rather than the employment perspective. I believe investors in CRE are going to lose at least as much on average as homeowners, but you're probably right that some degree of construction employment will continue.
Much of what has been built recently won't be very adaptable for new uses, Government stimulus is likely to go in this general direction, and maybe there will even be a need for new factories if the dollar falls low enough. Plus Residential Construction is going to drop to almost nothing, so it won't be hard for Commercial to beat Residential by that measure.
all this discussion raises (but does not beg) the question; what is a reasonable rent for commercial real estate?
Locally, the two strip malls that finished exteriors last year remain unoccupied except for a hair saloon and a payday loan store.
Walmart put up a sign announcing their new store at my end of the valley early last year; two streets were realigned, some power and phone lines rerouted, water and sewer installed to the edge of the property, but no store yet. Seems like atypical behaviour for Wally world.
--
Misean,
I got a great spot!
Jas
--
) on CRE!
Ah, found CRs blind spot (my specialty
Several massive high-rise condo projects planned for the area have been either halted or delayed. Add to that halting expectations for weakening retail sales. Downtown has struggled to find retailers along its Pine Avenue artery and at downtown developments like the Pike at Rainbow Harbor and CityPlace. "We're rather pessimistic on retail," Kyser said. "And that spells tough times for downtown Long Beach. To survive you need retail."
Rebuilding L.B.'s economy - Press-Telegram
THERE WERE MANY MANY PROJECTS THAT WERE JOINT RESIDENTIAL & COMMERCIAL DEVELOPMENTS. There was one huge project north of Palm Springs that I believe opened up already (I read about it in a local paper during a stay three years ago).
Jas
CR may be right; during this forthcoming depression, the CRE downturn may be lighter than the RRE downturn.
He certainly has history on his side: in the '29-'33 depression, RRE fell 85%. CRE, indeed, did better; it only fell 80%.
Hope the CRE folks feel better, now.
I agree, Gary.... "It's sort of Three's Company meets Aadams Family, Meets Survivor, meets Wall St." ..
Sara Silverstein as Tanta - Stephen Colbert as CR himself - Jas played by Daniel Day Lewis from There Will Be Blood - O-Joe played by Drew Carrey - Sebastian played by William Macy from Fargo - MP played by Christopher Lloyd - Conjure Bag will of course play himself.
Fight sequences choreographed by Yuen-Woo Ping.
That's my pitch. Can I haz development money?
Yossarian - Awesome!
Here's my anecdotal addition to the CRE meltdown. I think it was the Irvine Company who just built a whole slew of 2 story office buildings at Jeffrey & the 5, just down the street from me. I drive by all the time and I only see one tenant so far in what I believe is 16-20 buildings.
Bummer...
jg writes:
He certainly has history on his side: in the '29-'33 depression, RRE fell 85%. CRE, indeed, did better; it only fell 80%.
Where can that actual info be found? Also, if someone can help me out, I read that no other asset class has out returned the stock market over 20 years according to Jim cramer, and I was wondering if that is true.
over any twenty year period that is.
CR,
I don't think you are going to win this debate without some solid supporting facts. So, I'm afraid you are not going to win this debate. That is okay, if you knew everything, you'd be Jas. Nobody wants to be Jas.
--
Elvis,
Popularity has its price. Of all people you should know!
Jas
--
The P Train,
Past performance is not a guarantee of the future results! This will apply to Scams, aka stocks.
It Is the Scam Market, Stupid!
Jas
Jas, your message confuses me.
Let's try not to be ironic about things. Of course past is not a guarantee of future, but it is a damn good indicator. If you are short stocks, maybe that is why you are having this reaction?
Simply, I am asking if during any 20 year period if the stock market has outperformed any other asset class. Ceretainly, real estate market is going to go down, so is the stock market in my opinion over ther short term--that is more of a long term question. I am interested in real estate and the stock market and trying to pick which business to get in to. If the stock market truly performs better than the re market over thee long term, and over all 20 year periods, that influences my decision. Try not to judge that that is smart or not because you don't know my entire situation. Thanks if you have any info on that.
Also, remember there are foreign markets. I certainly hope your not saying that all markets are shams over the long run.
comment on your message
CR, You have no clue about CRE, if you think the decline will be shallow. Just one clue - people like Sam Zell do not sell their lifetime business on a dime.
Best,
TB.
The slowdown and the eventual collapse of CRE will kill the local banks... They hold the paper! They were able to pass off the Residental crap to Wall Street and they thought hey...lets do more CRE better return so they thought.
The number of vacancies on our main retail strip in town has definitely increased. Interestingly, it's been a few locally owned retailers, and some national brand stores (think Sprint, Pier One, Pep Boys, Jamba Juice, etc.) Interestingly, I am not seeing many new tenants coming in to fill the empty space, though there are a couple (there's an Apple Store coming). It's been entertaining to watch the bubble pop on some of the smaller higher end, aspirational, places over the past few months.
P-T-, go to here, select 1929 for the first year, select annual data, and hit update. CRE is line 9, RRE is line 11.
U.S. Department of Commerce. Bureau of Economic Analysis
Thanks for the link and info! I thought you were talking about actual values as opposed to GDP. GDP would be something akin to value produced that year right, not actual value. This was real intersting to me because I did some research a year ago or something and recalled actaul stock values in depression dropped around 90% as i recall from peak to bottom--I wonder how much the actual value of rre and cre went down during that same time.
One of the ugly parts of commercial is older buildings that can't be sold as is. Wrong materials, outdated or illegal safety, out of spec for current code, unrepairable handicap access issues, you name it.
I'm seeing the few buildings that make it to "sold" require gutting and complete reconstruction. Not much point anymore, when business success is so iffy. On top of that, you can inherit toxic issues and become good friends with EPA. The smart guys just build new, in some place where NOBODY has been.
With the credit crunch, the "new build" option goes away, and no one can afford to update an older building (especially for retail).
I posted this late on an earlier CR CRE blog item. Its pretty clear that the "overbuild" equation is about to change dramatically during 2008. This indicates to me that 32 mill sq ft of CRE ABOVE the 2000-2006 average has/is hitting the market just as the economy hits what will undoubtedly be a deep and not so short recession. I think CRE is headed way down and the bottom can take care of itself for now. To make money that's all I need to know;
Commercial Builder Woes: What if Theres No Tenant at the End of the Rainbow?
"Some 145 million square feet of new retail space was built in the top 54 markets last year, with another 123 million square feet in the pipeline this year, according to Property & Portfolio Research. By comparison, the annual average between 2000 and 2006 was 118 million square feet."
Commercial Builder Woes: What if There’s No Tenant at the End of the Rainbow? - Developments - WSJ
couple reasons i do not think the cre blowup will be worse than say 1986ish vintage loans. let alone the current resi blow up.
--derivative markets. some good and bad with this space,..but there is little doubt that the result was an extremely rapid repricing of risk in cre forcing lenders to tighten up, even in the face of strong loan performance.
-current levels on derivatives and bonds related to cre have more to do with technicals than they do real implied value. i see it everyday from my seat, the depth of these markets buy or sell is as thin as it gets, just even hint at buying or selling and you move the markets. and the amount of people being forced to sell bonds, or buy hedges at any price far out numbers of true value investors. i wouldnt call that a market that is efficient enough to predict anything from.
-delinquencies in CMBS today are still very low historically.
-borrowers have far more cash today than they did back back then.
-regarding the overbuilt discussion. we are nowhere near the levels of the mid/late 80s. we are at moderate levels, and with lending drying up over the past year, the current level will drop even more.
-equity markets are still holding up. if they fall apart (not saying they wont, but i am 100% sure they are more efficient then evidence such as "my brother owns a building in bakersfield and...) then maybe you will have the tenant disaster you forsee. So if you are looking to profit from your prediction, there are many opportunities to short certain equities.
-maturing loans, not many in 2008 from what i can tell, and many of the ones that do mature, are performing well enough to be able to get a refi.
-GE Building,..3 bidders north of $3Billion. stupid? maybe, but there is a line of proven investors ahead of you if you want to play.
-cap rates, will back up some, but if you think they are going back to the mid nineties you could be waiting a long time. i dont see loan coupons remaining high enough to cause it. coupons are high today only temporarily, they will drop once prices do
my analysis does show prices dropping potentially as much as 20-25%, peak to valley in the next few years due to tighter underwriting, higher cap rates, rates on loans, downward pressure on rents, etc. prices also dropped similarly in the late 80's, but some of the drivers of actual losses that were in place back then are far less today.
so will losses be higher than the past 10 years in cre...sure, very possible. but a disaster anywhere near the resi situation? unlikely. But i would be very careful if you plan on putting your hard earned money to working shorting it. it may take more time and money than you have to realize a gain as the losses may not show up for a while if at all. shorting these markets today is like flipping houses in 2005/2006. you may not want to be left holding the bag when the merry go round ends.
btw, a little background on myself, i have been a california housing bear since 2002,..and unlike the UCLA guys, i stuck to my belief over the years and continued to look stupid calling it. so i dont think i am exactly overly optimistic, but a solid case could be made that i have bad timing.
best of luck
es
Interestingly, I am not seeing many new tenants coming in to fill the empty space, though there are a couple .
rc helicopter
Tactical Flashlights
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