Another Commercial Real Estate Bubble Forming?
Is a commercial real estate bubble forming again?
Yesterday, there were a flurry of articles coming across my news feed that seemed to contradict each other. There seems to be a general consensus that we are headed for a double dip in the economy back into another recession (Hah! As if the last one ever ended!) with unemployment and housing still being among the main drags on attempts at economic recovery.
On the other hand, there appears to be speculation in the private equity arena with increasing debt leverage being used to buy businesses and commercial real estate as well as shares of real estate investment trusts (REIT’s) being purchased even as share prices rapidly climb with more REIT’s being formed to meet the demand for REIT shares.
As I’ve mentioned in previous blog posts, our media has become prone to publishing whatever will sell, whether it be about the unrest in the Middle East or about Tiger Woods having an affair with Arnold Schwarzenegger. I no longer fully trust what our media puts out there and only look for broad generalities among various sources that seem to either corroborate or contradict my beliefs. From what I’ve seen, heard, and read, I strongly believe that our economy is not healthy and that it is foolhardy to throw wads of cash at any investments that are essentially illiquid, including commercial real estate, unless you can acquire these investments at discounts so low that you can slide them under the belly of a pregnant ant. To sum it all up, I see another commercial real estate bubble forming.
Allow me to explain what I learned about shares of stock and shares of REIT’s. When I was young and foolish, I believed that share prices were somehow linked to how well a company or REIT was performing financially. I figured that if a company or REIT was making tons of money, then its share prices would somehow magically incorporate those humongous profits into the prices so I would buy shares at premium prices and figured that as long as I paid attention to financial statements that all would be well. Of course, I lost a lot of money by purchasing dog shares of stocks and REIT’s, which is why I no longer buy them unless I feel like gambling instead of investing. It finally hit me that stock and REIT shares are only worth what someone is willing to pay for them, not on how well a company or REIT is performing. A good company or REIT can have a lousy stock performance and vice versa. This is why when I see a news article on how well REIT’s are performing, I just shake my head and can only imagine who will be left holding the bag once share prices hit their peaks again and nobody else wants to buy at those elevated prices. Buying and selling shares of companies and REIT’s have always been sucker bets where you buy mainly with the hopes of one day unloading at prices higher than what you paid to another sucker. When speculators buy mainly with the hopes of making a quick buck, bubbles form whether it be in business, commodities, or commercial real estate. As corroboration of another bubble forming in commercial real estate, REIT share prices have increased at alarming rates, in my opinion, in too poor of an economy to justify it. Market analysts determined that the self-storage sector led the way with an 18.40% gain for the first five months of 2011; followed by office with a 17.81% return; multifamily at 16.88%; and then industrial, up 16.07%. Retail also posted strong gains, up 12.97%, with regional malls driving the growth with a 17.58% return. And yet, the deal making continues at a rapid pace with no signs of abating.
The overall view of our economy indicates that we will be stuck in a rut for at least several more years and speculators are even buying up credit default swaps (CDS’s) to bet on the United States either defaulting on its debt or coming very close to doing so. Not even five years ago, it was unheard of that the US would ever default on its debt but now with a $14.3 trillion bill to pay off, default is becoming a possible reality. I’d still like to think that Uncle Sam won’t default on its debt but if it does, our American dollars will be worth less than the toilet paper that they use in China.
Despite my rather pessimistic outlook for the near future of our economic health, there are still good deals to be had in commercial real estate as long as you factor in a deteriorating economy. I heard a developer, who last year purchased a vacant shopping mall in Vicksburg, Mississippi, say that we should count on occupancies decreasing another five percent from their present values before things start to get better. If you should go after commercial income properties now, be sure to pad your numbers accordingly.
For those of you who are still acquiring commercial real estate even in this tough economy, some recent commercial real estate assets from my database that are located in some of the recently well-hyped “emerging markets” that may now be in trouble include:
| Property Name | Street Address |
City, State | Asset Class | $ Amount | Est. 1st Mortgage $ | Notes |
| Monterone at Canyon Creek | 9009 North FM 620 | Austin, TX | Apt | $40.9 million | $35.4 million | Delinquent/Default; Foreclosure Initiated |
| 8-9 Carol Circle | 8-9 Carol Circle | Boston, MA | Apt | $4.7 million | $3.8 million | Delinquent/Default; Receivership, Admin, Special Servicer |
| Wedgwood Village Shopping Center | 5264-5322 Trail Lake Drive | Fort Worth, TX | Retail | $8.7 million | $6.3 million | Delinquent/Default; Transferred to Special Servicer |
| Academy Shopping Center | 13400 I-10 East | Houston, TX | Retail | $5.7 million | $4.3 million | Delinquent/Default; Transferred to Special Servicer; Foreclosure Initiated |
| Alexandria Park | 8809 Belford Ave | Los Angeles, CA | Apt | $21.4 million | N/A | Lender REO |
| 176 Madison | 176 Madison Ave | New York, NY | Retail | $11.5 million | $29.5 million | Foreclosure Initiated; Stalled/Incomplete |
| 317 W 35th St | 317 W 35th St | New York, NY | Apt | $7.7 million | $6 million | Owner/GP Bankrupt |
| Galaxy | 1620 Melrose Ave | Seattle, WA | Apt | $4.5 million | $7.3 million | Foreclosure Initiated; Auction/Trustees Sale Scheduled |
As a last note on this post, in this writer’s opinion, commercial real estate has yet to hit bottom so I can’t emphasize enough for you to buy with extreme caution. When the commercial real estate bubble finally does pop, it ain’t gonna be pretty.
Here are a few related sites that may give you more information relevant to your needs. Thanks for visiting Aesir Group commercial finance.
Home Remodeling http://finance.yahoo.com/real-estate/article ...
Finance Jobs at Fairfax County Government | washingtonpost.com
AOL.com Video - How Much to Pay Your Real Estate Agent
CIT Group Launches Real-Estate Business - WSJ.com
Mezzanine Financing: Definition from Answers.com
John Hancock Financial Services Inc.: Information from Answers.com
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Commercial Real Estate News
property manageme... (1)
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