It seems like I've been hearing about the coming commercial real estate crash for a long time now. This real estate guy on New Geography explains why in his view, it really is about to hit, and how we're all in for a world of hurt. Excerpt:
A year from now, the landscape of America will be forever changed. The office and retail markets will be vastly different than they look today. Not much of it will be good. Five years from now, will empty shopping centers and auto dealerships remain shuttered or will they be rebuilt or torn down and their use converted to something more productive? Will our politicians cease their meddling in the market and allow the market to heal itself? These are questions that will haunt our economy for the next decade.
Could be. I talked to a real estate agent today about the economy. He said he's had a terrible year. "And it's going to get a lot worse before it gets better," he told me. He went on to say that financial trader friends of his are deeply pessimistic about our economic future. Said this fellow, "Those guys believe we're going to see 25 percent unemployment before this thing turns around. That's Great Depression levels."
If this stuff comes to pass, ideas like Slow Money will seem awfully boutique.
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Actually Fannie and Freddie are in the apartment finance business but their portfolios should do quite well. They are conservatively underwritten for long terms, much like residential mortgages. The biggest risks right now are the refinancings of the customary short to mid-term loans (ex. 5 years with 30-year amortization) that need refinancing. Many of these have been converted to MBS securities so it's harder -- but not impossible -- to intervene in the market to assure credit flow so matured loans do not have to be foreclosures. Falling values and increased vacancies also hurt, but we learned an awful lot from the 1990 commercial real estate meltdowns about interventions.
Liam, @ 12:08 PM, writes:
"I know, however, that for addicts of declinism (just as much of an addiction as bubble-ism, as it were), anything that feeds the ideology will be devoured. Get a clue."
Don't count me in among that population. I have five kids, and if you think I want to see them living through a real-life version of MacCarthy's "The Road" or Heinlein's "The Day After Tomorrow", please think again. I figure that if I can wake enough people up, some of them might actually DO something---maybe even enough to keep the Big Bad Nasty Awful THING from coming to pass.
Shoot, Liam, I may well be wrong. You may think we may all be living on the Big Rock Candy Mountain, drinking root-beer floats and eating custard pies all day by this time next year. If you can back it up, go for it. I like custard pies.
But I don't think I'm wrong.
Either way, I owe those who read my posts what I see as the truth.
There's an obligation there. If you can prove me wrong, go ahead. Make my day.
Your servant,
Lord Karth
well one thing it proves is that CRE (Community Reinvestment Act) which gets blamed all the time for the housing bubble collapse - wasn't why banks made bad loans - neither Fannie nor Freddie have any involvement in commercial real estate loans - yet the banks still made bad loans - allegedly 55% of all commercial real estate loans are in jeopardy. So it looks like banks make bad loans even when the government isn't involved.
Yeah, they just built all this commercial stuff to service...what again...oh yes acres and acres of new homes financed in many cases by CRA funds. So this proves nothing!
I am an economic illiterate. So, I'd like to thank Lord Karth, Jon, and those if you who actually know something about all this, for trying to interpret what all the recent events mean. It's very useful to me, even when you all don't agree.
Of course we have not seen the bottom to the real estate market. We had a real estate bubble that was a larger percentage of the total GDP than Japan's real estate bubble, which began crashing in '92. Japan's real estate prices did not bottom out until '04. Why is anyone so silly as to think that our real estate market can self-correct in only 2-3 years? Of course, real estate, both residential and commercial, will continue to decline for at least another 5 years, perhaps longer. Do remember that when SoCal's last bubble popped in '90, that its real estate prices did not reach bottom until '97. It is silly to think that our real estate market will recover in any less time this time around.
When you have a bubble, the piper must be paid sooner or later. The bigger and longer the bubble, the more payment demanded by the piper. This time, the piper demands a whopper.
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