The obvious questions are how much new space was needed during a jobless recovery and did retail construction bubble with residential over the past 7 years. If little or now new space was needed b/c a lack of job expansion and sending jobs overseas, the office market is still way oversupplied. Retail seemed to explode with cheap money and rooftops. The bubble pop should be equally severe in retail. Compound that with a deep recession, loss of jobs, and CRE could be on the brink of a massive meltdown. I think the odds are 95% for a meltdown.
Interesting to see that there is such a sharp drop in CRE. I would tend to agree with you CR, but I was wondering if you had a link to publicly released figures regarding vacancy rates?
As an aside, I really like the circles in the graph. The human interface designer in me really likes the differing colors highlighting the severity of the drop as well.
ResRE and ComRE are/were symptoms of a credit bubble. Residential has already gone off the graphs of previous cyclical busts. Commercial is IMO even more sensitive to the credit markets. I would add to that this time there is an internet thingy that will likely exacerbate an historic over retailing of America. To give you an idea here is a quick sample of retail near the Dawg House:
There are 3 Linens'N'Things within 9 miles.
There are 2 Foot lockers within 12 miles.
Ann Taylor, 10 miles away.
Zales, 7 within 40.
Costco, 3 within 16.
Walmart, 8 within 35.
Home Depot, 4 within 20.
There is probably a "Target" (5 stores within 12 miles!) painted on my house.
I hasten to add that I probably deserved the chastening, but offer by way of excuse or explanation the fact that I was in hospital at the time and not enjoying the experience.
Great stuff. However, fundamentals and all that sort of fluff not important here on Bizarro world. I will now look to go ultra leveraged long the DJ USREIT Index to make mega millions and use money to take over the world.
Interesting piece. While we have not had a huge build up in CR, there is still buildings going up, recession on the horizon if not started already, outsourcing of jobs to continue, and low CAP rates for the current CR loans. Unless CAP rates are increase due to inflation, it would be easy for some areas to suffer a greater loss for CRE.
Based on what I see in Phoenix, commercial real estate is way overbuilt and vacancies in pretty much every category will go up over the next year or so just as a ton of new and remodeled space is coming on line.
Plus there are still lots of old empty buildings in town. The economically sensible thing to do would be to use those spaces instead of building new. It will be interesting to see whether the cost of renovating an old building will continue to be as high as building new, or whether folks will find cheaper ways to make do. If the latter, you could add a lot of space without adding much to the magic, inflatable GDP numbers.
There is potential for public projects to pick up some of the slack, but Arizona may not have access to the money to pay for it.
RobDawg, There are 3 Linens'N'Things within 9 miles.
There are 2 Foot lockers within 12 miles.
Ann Taylor, 10 miles away.
Zales, 7 within 40.
You won't have to worry about those stores much longer.
Q4 2008-Q1 09 is when the real fun begins in CRE. Most current projects should be coming online with nothing new to replace it. Everything built to service the zomburbs and suprisingly high end retail are gonna get killed. High end rents are walking a knife edge and when that goes it'll get ugly quickly.
The crazy part is of rehabs in places where demographics have turned for the worse. Nothing like dropping $2mm for a stripmall, kicking in another $500m to tart it up, only to lease to a dollar store.
That's the sound made when Conjure and thousands of his bear friends are simultaneously ripping the figurative and literal balls off Wall St investment touts.
That's the sound made when Conjure and thousands of his bear friends are simultaneously ripping the figurative and literal balls off Wall St investment touts.
mp | 04.27.08 - 3:31 pm |
What's really going to be interesting is the profit model for consumables retailers. Grocery store shelves are full of ultra high profit products with the real food pushed to the fringes. The same for things like auto parts. No more bling to subsidize cheap oil filters. Oh, and if you need tires get them now. The new batches are going to reflect raw materials and energy prices.
How is that going to happen when those same pigmen and their cohorts control all main stream information dessemination as well as money supply, credit supply, statistics supply, taxation supply, and perception supply.
I mean, for the markets to go up in the face of some fairly daunting news and prognostication recently takes a concerted effort, so I think that the pighorts are all more or less on the same page. Inasmuch as knowing which side of their bread is buttered that is and wanting to keep it that way.
"That's the sound made when Conjure and thousands of his bear friends are simultaneously ripping the figurative and literal balls off Wall St investment touts."
How is that going to happen when those same pigmen and their cohorts control all main stream information dessemination as well as money supply, credit supply, statistics supply, taxation supply, and perception supply.
I've created a simple-minded GDP forecast spreadsheet, just for kicks. (I don't really see the point in actually forecasting a GDP number, I'm more interested in the broader issue of recession/no recession, which is a lot easier to figure out.)
Taking the raw real U.S. GDP historical data, I first created the year-over-year quarterly growth (IOW, Q1 2007 over Q1 2006, Q1 2006 over Q1 2005, etc.) numbers for the past 40 years.
Then, I calculated the standard deviation of the most-recent 4 quarters of GDP growth, extending it out throughout the four decades. (Rolling through the data 4 periods at a time.)
Next, I created an "error band" around the actual GDP number, adding 2X the standard deviation to it, and also subtracting 2X stdev from it.
Finally, I checked to see how often the next quarter's GDP fell within the range based on the previous 4 quarters of data.
As it turns out, it happens a little more than 79% of the time.
So, my in-the-spirit-of-fun guesstimate of Q1 2008 real GDP growth (over Q1 2007): Within a range of +1.3% to 3.61%.
The reason I did this is that I've been reading off and on about GDP forecast methods, and regardless of how sophisticated they are or how many data-points are included, it's possible to get in the ballpark with extremely simple methods.
As long as you don't let your biases torture the data until it admits to something that isn't really true, anyway.
Note that after the 1986 crash, the fraud was extensive into insurance companies (then the major source of CRE funds, with pensions), and that the interest rates were much higher than now (8% plus then, 6% nominal now). Also, there were a few texans actually went to jail. REITS and megainvestments didn't exist in the present form, all of which drastically changes any attempt at projection. Interest rate source:http://www.economagic.com/em-cgi/data.exe/feddal/rmbkprim
The frauds in 1986 were also heavily in oil and false insurance policies; oil is now strong etc. Lastly, no one is afraid of jail for securities or other fraud today, by and large, and there is utterly no regulation of the giant pools of money now in international circulation.
mp, I hope you are feeling well. You have to put Asha's comment in the proper time period - I think she made the comments 2 or 3 years ago. Since then construction has lost jobs, but until recently, the rest of the economy continued to grow. I think the contribution of real estate to employment - during the recovery and at the peak of employment - was significantly less than 40%.
albrt, some areas are definitely way overbuilt - mostly the same areas with too much residential inventory. For other areas, it's probably not too bad.
Sebastian, you never fail to get me chuckling. Hope you're having a good weekend, and staying properly diversified in the face of all the good news you've dug up.
MLM said: "Sebastian, you never fail to get me chuckling..."
With 3 standard deviations, 90% of the forecasts hit within the range. Even with a wider band, the low end of the range of forecast GDP growth is still +.73%.
Going strictly by the numbers, it doesn't look like good news for recession enthusiasts.
Sebastian,
Nothing like a little light number crunching for a lazy Sunday. Thanks for the chuckle. You should work for the anthropomorphic global warmists.
Having sold a piece of commercial retail land in 05 and knowing the terms the developer received, I fear some REITs will suffer. Seems a lot of developers and retailers use demographics and household income to determine where to site. Ops.
I do have a small (7000 sq ft)project to start this fall and I'll need to touch base with the bank regarding terms. I'll let you know how hard they want to hammer us.
"So, my in-the-spirit-of-fun guesstimate of Q1 2008 real GDP growth (over Q1 2007): Within a range of +1.3% to 3.61%"
Fun is right. The printed GDP number might as well come in your fun range, for all it's worth. I simply don't buy into the inflation adjustments. I would imagine it wouldn't be difficult to find a lot of others to agree with my assessment, since now cost-of-goods is the top concern of voters, outweighing Iraq, global warming, health care, taxes... EVERYTHING.
Why should they be concerned IF inflation were really ~2% ?
There was plenty of CRE here in the metro ATL area before the housing bubble even took off. Theyre still building both here like wild fire. Ive seen the same Grubb & Ellis signs in some places for a long time. Its going to be bad.
Sebastian,
It was the ±2∂ being "right" 79% of the time that made me smirk. That range should be right 95.45% of the time if there were validity to your method.
Color me puzzled, but I don't understand why the builders are continuing to assemble their McMansions and their (empty) strip malls here on the west side of Indianapolis. From the other people I talk to and read, the same thing is occurring elsewhere.
It makes no sense to me. The houses aren't selling, certainly not at the numbers originally projected, and the strip malls built two years ago are still empty. Oh, wait, one has a tanning salon in it; quite the anchor, I'm sure.
Were I the top management of one of these huge corporate home-builders, I'd immediately shut down production, sell off my excess land, auction the remaining unsold houses, and reconsolidate ASAP. After all, we are all about "shareholder value," right? Right?
Also, the other day I saw them tearing down a Kroger supermarket to build a LA Fitness. The really strange thing was it was an anchor store in the middle of the shopping center. There is plenty of space within a mile of there to build one without tearing down a Kroger right in the middle of the shopping center.
Ah! But I think Kroger is on the way out. Teh Super Wal-Martz has killed them as a low-end grocery store. There's nothing else in my sister's little town, and very little else out here in the wilds of west Indianapolis.
What Sebastian is doing with his GDP calculations has a fancy name, something like "theory of persistence." It's sort of like saying "The weather four days from now (you can choose your own time interval here) will be like today's." I think this prediction used to be as accurate as those coming out of most weather forecast models when the interval was chosen properly (when it was long enough probably). Of course, it has little predictive value. Long stretches of sunny days are sometimes followed by rain storms!
As far as CRE is concerned, the issues will be region-by-region. In California, some areas are mightiliy overbuilt with retail, others not so much.
Where there was a great deal of new RE, retail was doubly overbuilt. Where there was less new development, less new retail.
In the last ten years, my entire county added only two classic big-boxes: two Home Depots. But we also have limited developable land, and so new home building was more restrained.
mp,
Good to see you back and hope you are feeling better - sure sounds like you are. That incredible - BOTTOMED call in Financials has worked for me. Is Conjure still sticking with it because of the Paulson put? I can understand why he must be insufferable right now... going long C ... must be hard for the fella.
Noble, Mp Hope you hold your C for years to come. Don't let these guys scare you. Obviously they have bottomed. The balance sheet is looking great, the dividend is safe as ever and happy shareholders are a testament to this. Sure they cut the dividend but corporate has assured us this is the last time, Twice! C is too big to fail. Party on.
It just seems that with the incredible computing and telecommunicating power we all have at our fingertips it is going to be even easier for businesses to cut their fixed cost of office overhead.
Sebastian wrote: With 3 standard deviations, 90% of the forecasts hit within the range. Even with a wider band, the low end of the range of forecast GDP growth is still +.73%.
Congratulations, you have rediscovered the confidence interval:
At least a gaussian has a mean, and it's tails fall off exponentially. Can't say that about a Cauchy-Lorentz or several others. I laugh when I hear someone talk about a 6-sigma event, much less more than one. They should try looking at a histogram rather than assuming things are 'normal'.
The key thing is that these are just models and the math is easier (read possible) for some, but that doesn't make them accurate. Good economists know it, and the ones I respect have a better understanding of differential topology than I ever want to.
One Guy Who Has Seen It All
Doesn't Like What He Sees Now
By E.S. BROWNING
April 26, 2008; Page B1
Peter Bernstein has witnessed just about every financial crisis of the past century.
As a boy, he watched his father, a money manager, navigate the Depression. As a financial manager, consultant and financial historian, he personally dealt with the recession of 1958, the bear markets of the 1970s, the 1987 crash, the savings-and-loan crisis of the late 1980s and the 2000-2002 bear market that followed the tech-stock bubble.
One of Peter Bernstein's worries: 'If China goes into a recession, God knows.'
Today's trouble, the 89-year-old Mr. Bernstein says, is worse than he has seen since the Depression and threatens to roil markets into 2009 and beyond -- longer than many people expect.
Mr. Bernstein, whose books include "Against the Gods: The Remarkable Story of Risk," sees two culprits. One is the abuse of securitization -- the trend for banks to hold fewer loans on their books and instead turn them into securities that were sold to other investors. The other is simply years of overborrowing by financial institutions and consumers alike.
Mr. Bernstein is hopeful that Federal Reserve intervention will prevent deflation and depression, but he says there is no guarantee.
Excerpts of a recent interview:
WSJ: Aside from securitization, what were the main causes of the problem?
Mr. Bernstein: You don't get into a mess without too much borrowing. It was sparked primarily by the hedge funds, which were both unregulated by government and in many ways unregulated by their owners, who gave their managers a very broad set of marching orders. It was a real delusion. It was like [former New York Gov. Eliot] Spitzer: "I am doing something dangerous, but because of who I am, and how smart I am, it is not going to come back to haunt me."
When you think about how all of this will work out in the long run, we are going to have an extremely risk-averse economy for a long time. The lesson has painfully been learned. That's part of the problem going forward. You don't have a high-growth exit from this, as you've had from other kinds of crises. We won't have a powerful start, where the business cycle looks like a V. Here, the shape of the business cycle is like an L, where it goes down and doesn't turn up. Or like a U, a flat U. The reason for that is that people aren't going to get caught in this bind again. They will tell themselves, "I'm too smart to do that again." And everyone else is going to be saying the same thing. It is, in fact, going to be a wonderful environment in which to take risk, because there aren't going to be any excesses.
I'm a child of the Depression, and I am thinking about what the early years were like after World War II. It took a very long time to get the memory of the Depression out of business decisions, and certainly banking decisions. I think this is going to be the same. The Fed, too, is going to be less decisive and is going to feel that what it should do is less clear. One of the things that gave people a sense that they could afford to take risks was the sense that the central bankers more or less know what they are doing. But I don't think we are going to feel that way going forward.
WSJ: You said that it could turn out that the smart thing to do is to take more risk, because everyone will be so risk-averse. What kinds of investments do you see as the big winners coming out of this?
Mr. Bernstein: You could say: the things that have been beaten down the most, which would be real estate. But I think real estate is going to be under a cloud for so long, and you can't buy real estate with cash, it is too much money. I think you should go with the stock market. If things are better, the stock market will go up, and if things are awful, the stock market is going to be way down. But it is a place where, if you want to take risks, you've got a wide range of choices. This is why I own stocks [in addition to other investments], because I don't know where the bottom is going to come, and I want to be exposed to every kind of possibility I can think of. And, at least, if you pick the stock market and you are wrong, you can change your mind. There is some liquidity there. Stocks never became cheap, but they didn't become crazy, the way other assets were.
WSJ: How long do you think this whole process will take, before we get back to normal?
Mr. Bernstein: Longer than people think. The people who think we will have turned in 2009 are wrong. There has to be a respite along the way. Nothing goes in one direction forever. But it will take longer than people think. If that weren't the case, I would be talking entirely differently. I would be saying, "What an opportunity we have got." And I just can't believe that the opportunity is here yet. There is too much to unwind.
WSJ: Can you explain the reason you think it will take a long time?
Mr. Bernstein: We have to go back to a moment when people have the courage to borrow and lenders have the courage to lend. Until credit is going up instead of down, you can't have growth. Housing has got to be a very important part of that; it always has been. You have to reach a point where somebody says, "This house is cheap, I am going to buy it," or where some businessman says, "This is a great opportunity for us to expand our business. Everything is available to us."
If China goes into a recession, God knows. The Iraq war and the whole situation with terrorism, we really don't know where that is going to come out. There are so many things that have got to get buttoned down before you say that the future looks good enough to take a risk.
WSJ: What kind of indications are you looking for as signs that the economy is about to get better and that the stock market and the investment world are about to turn the corner?
Mr. Bernstein: Somehow, the housing trouble has to at least flatten out. As long as that is going on, I think the pressure on the credit system is going to persist. It is kind of the leading indicator. It is where the trouble started. We have to underpin the consumer. That is why this is different. That is why this is like nothing we have had before.
Before, it was investment that made the V at the bottom of the business cycle. I don't see real investment turning enough without some sign from the consumer side. Maybe the foreign countries will do it for us. That is a substitute for consumption here. Maybe. But I think that they won't do enough for us, and maybe will be too infected by us to do it. But maybe growth in Asia will help us. The Asian thing is tremendously exciting.
Sebastian, I didn't realize you are as simple-minded as that. I could do what you did with even less effort, by making the observation that around 85% of the time the economy is not in a recession, and during those times when it is not in recession, growth falls in a band like 1% to 5% about 9 out of 10 times. Voila, in Q1, you are going to have 1-5% GDP growth with 76% probability.
CRE bust? Puuuleeease! US has great manufacturing, services are so well priced and necessary. Technology is so undersaturated. Sebastian is my hero, BTW. Housing is just a manifestation of the wealth created in other market sectors. People don't overspend, not in the US! Credit cards are used only for convenience and monthly balances are predominantly paid at month end. Americans are SO financially saavy, that to presume they didn't see overlending, oversecuritization, overconsumption coming, is ridiculous. America is still the world's growth machine.....Oh! excuse me, China and Asia-general is boycotting our bonds and corporate borrowing? NEVER MIND.
WE ARE SO TOTALLY SCREWED! LOOK AT BOTH SIDES OF YOU, 1 OF EVERY 3 PEOPLE WILL BE EATEN BY THEIR NEIGHBORS IN THE NEXT 16 MONTHS. YUM-YUM. I LIKE MINE WITH TENNESSEE BOURBON BARBECUE SAUCE.
mish wrote a good article a few days back on CRE. Basically 94 million sqft coming online this year. 15 million came on in Q1 only 1.8 million spoken for. Fugly
I was practically still a child in the early 80s but I do recall that tax breaks for commercial property were taken away and the market just tanked. Could that not have been a bigger factor than the general recession?
R Manhammer: Your question of why do the builders keep building? Has an answer. Builders build, as long as lenders lend. They get their pay on friday for building, If they can't sell it, that's the banks problem. A lot of these people have their money a year ahead. If you will read some of the postings, banks are being sued for not providing money promised to build projects that would be bankrupt when finished.
I sure hope the market is turning around. Either way this was a great article and really gives me hope.
I came across a site today called BuilderBrokerNetwork.com. For $60 a year you can post as many Commercial Listings and Wants and Needs posting as you want. I think the Wants and Needs is where you can post things that you need or what you are what you are looking for. It's a new site but for $60 a year how can you beat it. Plus, they have an email solution.
Other Commercial Real Estate sites cost over $600 a year so it might be worth checking out.
Well, good luck and I hope everyone is wheathing this storm.
..chirp..
..chirp..
most of the bust will happen during 2008
Cr=MR.Busta?
The obvious questions are how much new space was needed during a jobless recovery and did retail construction bubble with residential over the past 7 years. If little or now new space was needed b/c a lack of job expansion and sending jobs overseas, the office market is still way oversupplied. Retail seemed to explode with cheap money and rooftops. The bubble pop should be equally severe in retail. Compound that with a deep recession, loss of jobs, and CRE could be on the brink of a massive meltdown. I think the odds are 95% for a meltdown.
Interesting to see that there is such a sharp drop in CRE. I would tend to agree with you CR, but I was wondering if you had a link to publicly released figures regarding vacancy rates?
As an aside, I really like the circles in the graph. The human interface designer in me really likes the differing colors highlighting the severity of the drop as well.
ResRE and ComRE are/were symptoms of a credit bubble. Residential has already gone off the graphs of previous cyclical busts. Commercial is IMO even more sensitive to the credit markets. I would add to that this time there is an internet thingy that will likely exacerbate an historic over retailing of America. To give you an idea here is a quick sample of retail near the Dawg House:
There are 3 Linens'N'Things within 9 miles.
There are 2 Foot lockers within 12 miles.
Ann Taylor, 10 miles away.
Zales, 7 within 40.
Costco, 3 within 16.
Walmart, 8 within 35.
Home Depot, 4 within 20.
There is probably a "Target" (5 stores within 12 miles!) painted on my house.
Bravo, CR.
OT, you chastened me a few weeks back relative to a discussion concerning the current labor "dynamic" and how it is always "different."
In reading Fleckenstein's book, "Greenspan's Bubbles," I note this little time bomb from Asha Bangalore:
"No less than 40% of new jobs since 2001 owe their existence, directly or indirectly, to the real-estate levitation."
What say you?
I hasten to add that I probably deserved the chastening, but offer by way of excuse or explanation the fact that I was in hospital at the time and not enjoying the experience.
Great stuff. However, fundamentals and all that sort of fluff not important here on Bizarro world. I will now look to go ultra leveraged long the DJ USREIT Index to make mega millions and use money to take over the world.
Interesting piece. While we have not had a huge build up in CR, there is still buildings going up, recession on the horizon if not started already, outsourcing of jobs to continue, and low CAP rates for the current CR loans. Unless CAP rates are increase due to inflation, it would be easy for some areas to suffer a greater loss for CRE.
Based on what I see in Phoenix, commercial real estate is way overbuilt and vacancies in pretty much every category will go up over the next year or so just as a ton of new and remodeled space is coming on line.
Plus there are still lots of old empty buildings in town. The economically sensible thing to do would be to use those spaces instead of building new. It will be interesting to see whether the cost of renovating an old building will continue to be as high as building new, or whether folks will find cheaper ways to make do. If the latter, you could add a lot of space without adding much to the magic, inflatable GDP numbers.
There is potential for public projects to pick up some of the slack, but Arizona may not have access to the money to pay for it.
While we have not had a huge build up in CR,
Square Feet Retail per person:
US 20.2
Sweden 3.3
UK 2.5
France 2.3
Italy 1.1
CR, our gracious host constantly reminds us of the millions of homes overhang in residential. I see the same thing in commercial.
MP ,
Glad to see you back in form.
Sorry bout the medical sojourn.
Did Conjure Bag mistake your danglies
for his regular portions ?
Square Feet Retail per person:
US 20.2
Sweden 3.3
UK 2.5
France 2.3
Italy 1.1
Those other countries aren't pulling their weight. Don't they know how much better your life is with your cupboards full of useless crap.
RobDawg,
There are 3 Linens'N'Things within 9 miles.
There are 2 Foot lockers within 12 miles.
Ann Taylor, 10 miles away.
Zales, 7 within 40.
You won't have to worry about those stores much longer.
Q4 2008-Q1 09 is when the real fun begins in CRE. Most current projects should be coming online with nothing new to replace it. Everything built to service the zomburbs and suprisingly high end retail are gonna get killed. High end rents are walking a knife edge and when that goes it'll get ugly quickly.
The crazy part is of rehabs in places where demographics have turned for the worse. Nothing like dropping $2mm for a stripmall, kicking in another $500m to tart it up, only to lease to a dollar store.
A much more intersting question (to me) is not the investement in new CRE but how the REITs will be doing.
So the issue is deamnd for office space, for mall space, for apartments - how can we measure this ?
Substance, Conjure has been insufferable since the Paulson Put. He was planning on shorting C to zero, but is now long of it instead.
My danglies are fine, but Conjure has been chewing the bark off a lot of trees lately, waiting for the next bear screamer.
Boy, the S&L crisis really put a permanent dent in CRE. Republicans really are bad for business.
Goodness, 30 sf of retail space per person in Canada in 04?
Goodness, 30 sf of retail space per person in Canada in 04?
Can't be true. It's different here. We have strong fundamentals. All RE is local. Our underwriting standards are better. God is on our side.
Or so I've been told.
They say the same about KC....
what's a bear screamer?
That's the sound made when Conjure and thousands of his bear friends are simultaneously ripping the figurative and literal balls off Wall St investment touts.
That's the sound made when Conjure and thousands of his bear friends are simultaneously ripping the figurative and literal balls off Wall St investment touts.
mp | 04.27.08 - 3:31 pm |
Best. Metaphor. Ever.
What's really going to be interesting is the profit model for consumables retailers. Grocery store shelves are full of ultra high profit products with the real food pushed to the fringes. The same for things like auto parts. No more bling to subsidize cheap oil filters. Oh, and if you need tires get them now. The new batches are going to reflect raw materials and energy prices.
mp | 04.27.08 - 3:31 pm |
How is that going to happen when those same pigmen and their cohorts control all main stream information dessemination as well as money supply, credit supply, statistics supply, taxation supply, and perception supply.
I mean, for the markets to go up in the face of some fairly daunting news and prognostication recently takes a concerted effort, so I think that the pighorts are all more or less on the same page. Inasmuch as knowing which side of their bread is buttered that is and wanting to keep it that way.
"That's the sound made when Conjure and thousands of his bear friends are simultaneously ripping the figurative and literal balls off Wall St investment touts."
Mmmm.... Mountain oysters, pretty tasty.
How is that going to happen when those same pigmen and their cohorts control all main stream information dessemination as well as money supply, credit supply, statistics supply, taxation supply, and perception supply.
Reality always wins in the end.
There's only so long anyone can fight it.
Too early to start gaming Q1 2008 GDP?
I've created a simple-minded GDP forecast spreadsheet, just for kicks. (I don't really see the point in actually forecasting a GDP number, I'm more interested in the broader issue of recession/no recession, which is a lot easier to figure out.)
Taking the raw real U.S. GDP historical data, I first created the year-over-year quarterly growth (IOW, Q1 2007 over Q1 2006, Q1 2006 over Q1 2005, etc.) numbers for the past 40 years.
Then, I calculated the standard deviation of the most-recent 4 quarters of GDP growth, extending it out throughout the four decades. (Rolling through the data 4 periods at a time.)
Next, I created an "error band" around the actual GDP number, adding 2X the standard deviation to it, and also subtracting 2X stdev from it.
Finally, I checked to see how often the next quarter's GDP fell within the range based on the previous 4 quarters of data.
As it turns out, it happens a little more than 79% of the time.
So, my in-the-spirit-of-fun guesstimate of Q1 2008 real GDP growth (over Q1 2007): Within a range of +1.3% to 3.61%.
Historical data at:
http://bea.gov/national/xls/gdplev.xls
The reason I did this is that I've been reading off and on about GDP forecast methods, and regardless of how sophisticated they are or how many data-points are included, it's possible to get in the ballpark with extremely simple methods.
As long as you don't let your biases torture the data until it admits to something that isn't really true, anyway.
Sebastia
Note that after the 1986 crash, the fraud was extensive into insurance companies (then the major source of CRE funds, with pensions), and that the interest rates were much higher than now (8% plus then, 6% nominal now). Also, there were a few texans actually went to jail. REITS and megainvestments didn't exist in the present form, all of which drastically changes any attempt at projection. Interest rate source:http://www.economagic.com/em-cgi/data.exe/feddal/rmbkprim
The frauds in 1986 were also heavily in oil and false insurance policies; oil is now strong etc. Lastly, no one is afraid of jail for securities or other fraud today, by and large, and there is utterly no regulation of the giant pools of money now in international circulation.
mp, I hope you are feeling well. You have to put Asha's comment in the proper time period - I think she made the comments 2 or 3 years ago. Since then construction has lost jobs, but until recently, the rest of the economy continued to grow. I think the contribution of real estate to employment - during the recovery and at the peak of employment - was significantly less than 40%.
albrt, some areas are definitely way overbuilt - mostly the same areas with too much residential inventory. For other areas, it's probably not too bad.
Best to all.
Sebastian, you never fail to get me chuckling. Hope you're having a good weekend, and staying properly diversified in the face of all the good news you've dug up.
MLM said: "Sebastian, you never fail to get me chuckling..."
With 3 standard deviations, 90% of the forecasts hit within the range. Even with a wider band, the low end of the range of forecast GDP growth is still +.73%.
Going strictly by the numbers, it doesn't look like good news for recession enthusiasts.
Sebastia
Sebastian,
Nothing like a little light number crunching for a lazy Sunday. Thanks for the chuckle. You should work for the anthropomorphic global warmists.
Rob Dawg said: "Thanks for the chuckle..."
You're welcome. But wouldn't it be something if I got close? That'd be worth a chuckle, too.
Sebastia
Having sold a piece of commercial retail land in 05 and knowing the terms the developer received, I fear some REITs will suffer. Seems a lot of developers and retailers use demographics and household income to determine where to site. Ops.
I do have a small (7000 sq ft)project to start this fall and I'll need to touch base with the bank regarding terms. I'll let you know how hard they want to hammer us.
"So, my in-the-spirit-of-fun guesstimate of Q1 2008 real GDP growth (over Q1 2007): Within a range of +1.3% to 3.61%"
Fun is right. The printed GDP number might as well come in your fun range, for all it's worth. I simply don't buy into the inflation adjustments. I would imagine it wouldn't be difficult to find a lot of others to agree with my assessment, since now cost-of-goods is the top concern of voters, outweighing Iraq, global warming, health care, taxes... EVERYTHING.
Why should they be concerned IF inflation were really ~2% ?
There was plenty of CRE here in the metro ATL area before the housing bubble even took off. Theyre still building both here like wild fire. Ive seen the same Grubb & Ellis signs in some places for a long time. Its going to be bad.
Sebastian,
It was the ±2∂ being "right" 79% of the time that made me smirk. That range should be right 95.45% of the time if there were validity to your method.
Color me puzzled, but I don't understand why the builders are continuing to assemble their McMansions and their (empty) strip malls here on the west side of Indianapolis. From the other people I talk to and read, the same thing is occurring elsewhere.
It makes no sense to me. The houses aren't selling, certainly not at the numbers originally projected, and the strip malls built two years ago are still empty. Oh, wait, one has a tanning salon in it; quite the anchor, I'm sure.
Were I the top management of one of these huge corporate home-builders, I'd immediately shut down production, sell off my excess land, auction the remaining unsold houses, and reconsolidate ASAP. After all, we are all about "shareholder value," right? Right?
Also, the other day I saw them tearing down a Kroger supermarket to build a LA Fitness. The really strange thing was it was an anchor store in the middle of the shopping center. There is plenty of space within a mile of there to build one without tearing down a Kroger right in the middle of the shopping center.
Ah! But I think Kroger is on the way out. Teh Super Wal-Martz has killed them as a low-end grocery store. There's nothing else in my sister's little town, and very little else out here in the wilds of west Indianapolis.
What Sebastian is doing with his GDP calculations has a fancy name, something like "theory of persistence." It's sort of like saying "The weather four days from now (you can choose your own time interval here) will be like today's." I think this prediction used to be as accurate as those coming out of most weather forecast models when the interval was chosen properly (when it was long enough probably). Of course, it has little predictive value. Long stretches of sunny days are sometimes followed by rain storms!
As far as CRE is concerned, the issues will be region-by-region. In California, some areas are mightiliy overbuilt with retail, others not so much.
Where there was a great deal of new RE, retail was doubly overbuilt. Where there was less new development, less new retail.
In the last ten years, my entire county added only two classic big-boxes: two Home Depots. But we also have limited developable land, and so new home building was more restrained.
mp,
Good to see you back and hope you are feeling better - sure sounds like you are. That incredible - BOTTOMED call in Financials has worked for me. Is Conjure still sticking with it because of the Paulson put? I can understand why he must be insufferable right now... going long C ... must be hard for the fella.
Noble, Mp Hope you hold your C for years to come. Don't let these guys scare you. Obviously they have bottomed. The balance sheet is looking great, the dividend is safe as ever and happy shareholders are a testament to this. Sure they cut the dividend but corporate has assured us this is the last time, Twice! C is too big to fail. Party on.
In the "it is different this time" meme:
It just seems that with the incredible computing and telecommunicating power we all have at our fingertips it is going to be even easier for businesses to cut their fixed cost of office overhead.
"How Deep, How Fast?"
Deep, baby, real deep.
But sloooooooooow. With feeling.
Ooooh baby, yeah.
cd
You think it's hard to get a loan on a condo?
Try getting one on a strip mall today.
Sebastian wrote:
With 3 standard deviations, 90% of the forecasts hit within the range. Even with a wider band, the low end of the range of forecast GDP growth is still +.73%.
Congratulations, you have rediscovered the confidence interval:
Confidence Interval -- from Wolfram MathWorld
P.S. the Gaussian distribution has tails that go out to infinity. One of the great bugaboos for economists -- they can't deal with it.
I've created a simple-minded GDP forecast spreadsheet
Sebastian
You? simple minded?
Hoocoodnode?
Ruskie-
At least a gaussian has a mean, and it's tails fall off exponentially. Can't say that about a Cauchy-Lorentz or several others. I laugh when I hear someone talk about a 6-sigma event, much less more than one. They should try looking at a histogram rather than assuming things are 'normal'.
The key thing is that these are just models and the math is easier (read possible) for some, but that doesn't make them accurate. Good economists know it, and the ones I respect have a better understanding of differential topology than I ever want to.
Just for humor:
Cauchy distribution - Wikipedia, the free encyclopedia
And I think the term Manhattan Mountain Oysters has a ring to it...
Lehman is the biggest CRE holder thru Tissman holding . Also has large chunk in I can't wait untill they claim earning thru lost cre rental income .
Nice to see you and conjure back mp. hospitals are no place for the sick!
btw, i'm looking forward to the statement from this Fed meeting.
Um, in the last two recessions, consumers still had some savings, and could borrow against the house and keep spending like crazy.
Now? Not so much. Will this hurt retail even more than the last two recessions, and thus CRE even more?
mp. Get well. if things get rough I offer Ipodius' balls for conjure. For nutrition. He seems like a bright lad.
Sebastian, your method sounds typical for todays day in age.
Your calculation doesn't take any fundamentals into account.
This is exactly how hedge funds and brokerage firms blow up. They make models based on historical data and not current fundamentals.
"If studying history would make you rich then we would all be librarians." Warren Buffett
One Guy Who Has Seen It All
Doesn't Like What He Sees Now
By E.S. BROWNING
April 26, 2008; Page B1
Peter Bernstein has witnessed just about every financial crisis of the past century.
As a boy, he watched his father, a money manager, navigate the Depression. As a financial manager, consultant and financial historian, he personally dealt with the recession of 1958, the bear markets of the 1970s, the 1987 crash, the savings-and-loan crisis of the late 1980s and the 2000-2002 bear market that followed the tech-stock bubble.
One of Peter Bernstein's worries: 'If China goes into a recession, God knows.'
Today's trouble, the 89-year-old Mr. Bernstein says, is worse than he has seen since the Depression and threatens to roil markets into 2009 and beyond -- longer than many people expect.
Mr. Bernstein, whose books include "Against the Gods: The Remarkable Story of Risk," sees two culprits. One is the abuse of securitization -- the trend for banks to hold fewer loans on their books and instead turn them into securities that were sold to other investors. The other is simply years of overborrowing by financial institutions and consumers alike.
Mr. Bernstein is hopeful that Federal Reserve intervention will prevent deflation and depression, but he says there is no guarantee.
Excerpts of a recent interview:
WSJ: Aside from securitization, what were the main causes of the problem?
Mr. Bernstein: You don't get into a mess without too much borrowing. It was sparked primarily by the hedge funds, which were both unregulated by government and in many ways unregulated by their owners, who gave their managers a very broad set of marching orders. It was a real delusion. It was like [former New York Gov. Eliot] Spitzer: "I am doing something dangerous, but because of who I am, and how smart I am, it is not going to come back to haunt me."
When you think about how all of this will work out in the long run, we are going to have an extremely risk-averse economy for a long time. The lesson has painfully been learned. That's part of the problem going forward. You don't have a high-growth exit from this, as you've had from other kinds of crises. We won't have a powerful start, where the business cycle looks like a V. Here, the shape of the business cycle is like an L, where it goes down and doesn't turn up. Or like a U, a flat U. The reason for that is that people aren't going to get caught in this bind again. They will tell themselves, "I'm too smart to do that again." And everyone else is going to be saying the same thing. It is, in fact, going to be a wonderful environment in which to take risk, because there aren't going to be any excesses.
I'm a child of the Depression, and I am thinking about what the early years were like after World War II. It took a very long time to get the memory of the Depression out of business decisions, and certainly banking decisions. I think this is going to be the same. The Fed, too, is going to be less decisive and is going to feel that what it should do is less clear. One of the things that gave people a sense that they could afford to take risks was the sense that the central bankers more or less know what they are doing. But I don't think we are going to feel that way going forward.
WSJ: You said that it could turn out that the smart thing to do is to take more risk, because everyone will be so risk-averse. What kinds of investments do you see as the big winners coming out of this?
Mr. Bernstein: You could say: the things that have been beaten down the most, which would be real estate. But I think real estate is going to be under a cloud for so long, and you can't buy real estate with cash, it is too much money. I think you should go with the stock market. If things are better, the stock market will go up, and if things are awful, the stock market is going to be way down. But it is a place where, if you want to take risks, you've got a wide range of choices. This is why I own stocks [in addition to other investments], because I don't know where the bottom is going to come, and I want to be exposed to every kind of possibility I can think of. And, at least, if you pick the stock market and you are wrong, you can change your mind. There is some liquidity there. Stocks never became cheap, but they didn't become crazy, the way other assets were.
WSJ: How long do you think this whole process will take, before we get back to normal?
Mr. Bernstein: Longer than people think. The people who think we will have turned in 2009 are wrong. There has to be a respite along the way. Nothing goes in one direction forever. But it will take longer than people think. If that weren't the case, I would be talking entirely differently. I would be saying, "What an opportunity we have got." And I just can't believe that the opportunity is here yet. There is too much to unwind.
WSJ: Can you explain the reason you think it will take a long time?
Mr. Bernstein: We have to go back to a moment when people have the courage to borrow and lenders have the courage to lend. Until credit is going up instead of down, you can't have growth. Housing has got to be a very important part of that; it always has been. You have to reach a point where somebody says, "This house is cheap, I am going to buy it," or where some businessman says, "This is a great opportunity for us to expand our business. Everything is available to us."
If China goes into a recession, God knows. The Iraq war and the whole situation with terrorism, we really don't know where that is going to come out. There are so many things that have got to get buttoned down before you say that the future looks good enough to take a risk.
WSJ: What kind of indications are you looking for as signs that the economy is about to get better and that the stock market and the investment world are about to turn the corner?
Mr. Bernstein: Somehow, the housing trouble has to at least flatten out. As long as that is going on, I think the pressure on the credit system is going to persist. It is kind of the leading indicator. It is where the trouble started. We have to underpin the consumer. That is why this is different. That is why this is like nothing we have had before.
Before, it was investment that made the V at the bottom of the business cycle. I don't see real investment turning enough without some sign from the consumer side. Maybe the foreign countries will do it for us. That is a substitute for consumption here. Maybe. But I think that they won't do enough for us, and maybe will be too infected by us to do it. But maybe growth in Asia will help us. The Asian thing is tremendously exciting.
Write to E.S. Browning at jim.browning@wsj.com
Sebastian, I didn't realize you are as simple-minded as that. I could do what you did with even less effort, by making the observation that around 85% of the time the economy is not in a recession, and during those times when it is not in recession, growth falls in a band like 1% to 5% about 9 out of 10 times. Voila, in Q1, you are going to have 1-5% GDP growth with 76% probability.
I agree with Elvis' logic, and find R-D-'s square footage/person numbers convincing.
It is going to be terrible for CRE.
Good one Renter, good one.
CRE bust? Puuuleeease! US has great manufacturing, services are so well priced and necessary. Technology is so undersaturated. Sebastian is my hero, BTW. Housing is just a manifestation of the wealth created in other market sectors. People don't overspend, not in the US! Credit cards are used only for convenience and monthly balances are predominantly paid at month end. Americans are SO financially saavy, that to presume they didn't see overlending, oversecuritization, overconsumption coming, is ridiculous. America is still the world's growth machine.....Oh! excuse me, China and Asia-general is boycotting our bonds and corporate borrowing? NEVER MIND.
WE ARE SO TOTALLY SCREWED! LOOK AT BOTH SIDES OF YOU, 1 OF EVERY 3 PEOPLE WILL BE EATEN BY THEIR NEIGHBORS IN THE NEXT 16 MONTHS. YUM-YUM. I LIKE MINE WITH TENNESSEE BOURBON BARBECUE SAUCE.
mish wrote a good article a few days back on CRE. Basically 94 million sqft coming online this year. 15 million came on in Q1 only 1.8 million spoken for. Fugly
Is this Seb???
Black & White On the Grey Matters Video by TWENTY POUND SLEDGE (formerly Super Slave) - MySpace Video
I was practically still a child in the early 80s but I do recall that tax breaks for commercial property were taken away and the market just tanked. Could that not have been a bigger factor than the general recession?
R Manhammer: Your question of why do the builders keep building? Has an answer. Builders build, as long as lenders lend. They get their pay on friday for building, If they can't sell it, that's the banks problem. A lot of these people have their money a year ahead. If you will read some of the postings, banks are being sued for not providing money promised to build projects that would be bankrupt when finished.
I sure hope the market is turning around. Either way this was a great article and really gives me hope.
I came across a site today called BuilderBrokerNetwork.com. For $60 a year you can post as many Commercial Listings and Wants and Needs posting as you want. I think the Wants and Needs is where you can post things that you need or what you are what you are looking for. It's a new site but for $60 a year how can you beat it. Plus, they have an email solution.
Other Commercial Real Estate sites cost over $600 a year so it might be worth checking out.
Well, good luck and I hope everyone is wheathing this storm.