Based upon what has been reported by the various media outlets recently regarding the so-called recovery in the Commercial Real Estate Sector…The real question is “what is the reality of an actual Commercial Real Estate Recovery?”
If you just came out of coma of 2.5 years and read any business paper/section etc, you would have to believe the United States’ economy is actually faring well and the commercial real estate market is well on its way to being as healthy as when you lapsed into a coma.
What is being reported is pure unadulterated fantasy or in other words pure propaganda.
The following is a list of facts which contradict the fantasy that is being reported:
1. Unemployment is still around 10% with real unemployment tracking around 17%
2. Credit is still extremely tight with only those individuals and companies that have stellar credit ratings even being considered to be credit worthy. Only High Value Core Commercial Real Estate Assets are being bought by Cash rich institutional investors. Even when these buyers look to finance the LTV’s are 60%-65%. The properties as previously stated in this Blog have High Credit Rated Tenants who have long term leases. This is exception to the real world, and yet reports even from the Data Providers such a Costar are trying to put this in a positive light. It’s not until you get into the body of their article do you learn that these sales are in 5 markets and are institutional grade investment buys. And this is a signal for the signs of a recovery…total nonsense.
3. Commercial real estate lending is still virtually nonexistent, with only so called “Trophy” properties being considered for loans. Refi’s are also problematic due to the decrease in base property values which have placed close to 50% of all commercial properties under water.
4. Vacancy rates are still extremely high in both the Office and Retail Sector. Has there been some leasing going on, of course, but not to extent to make a large enough dent to anticipate rental rates going up. The only sector taking space is the Federal Government, good for the Washington DC area landlords but that is it. Therefore you have your taxpayer dollars basically bailing out the private commercial real estate industry in the DC region. And that is a good thing for anywhere but DC why? However the Dark Clouds are approaching as the Obama Administration has ordered the GSA to find spaces to jettison and the growth that so many within this market thought was going to continue unabated will come to screeching halt!
5. CMBS delinquencies are rising and are at the highest rate in history. Special Servicers cannot keep up with the rate of defaults.
6. Bank failures are continuing and it is predicted the total number of Bank failures will exceed the totals from the early 1990’s. This does not bode well for mid to small business lending, as much of the bank failures have been community banks and smaller banks who have too many commercial real estate loans, especially construction loans.
7. SBA loans are few and far between. It was just reported last week in the WSJ the SBA loan program which guarantees 90% of the loan is out of money…Does anyone believe these banks will do SBA loans with less than the 90% guarantee? DO NOT COUNT ON IT.
8. Retail sales have been rising and anyone tied to the retail real estate sector is acting just short of giddy…but the current consumer spending that had been realized over the last couple of months is not sustainable and already there are signs consumer confidence is retreating once again. Consumers are saving more than at anytime since the Great Depression. The June Consumer Confidence Report fell from the low ‘70’s to the mid 50’s in just one month…can’t imagine why can you?
9. Manufacturing output has increased…yippee, not so fast as the production is due to replacing inventory not because of demand as companies curtailed new orders for so long existing inventory levels were dropping to critic levels.
10. The Major Banks (Too Big To Fail) are in fragile shape at best. Its only due to revised accounting rules and government bailout money have they been able to survive. Their balance sheets are another work of fiction. Just yesterday there was WSJ article highlighting the practice of ‘Extend & Pretend” as banks wrongly think time is their friend…yeah if they have 5-7 years. Meanwhile this keeps “toxic” assets on their balance sheets at false evaluations, meaning they haven’t even begun writing those loans down. Why has the Fed turned a Blind eye because if they had to realize those losses the banking sector would go back into the tank…
11. Government spending is out of control and getting worse.
12. Taxes of all kinds will be going up substantially, and add the ‘Carried Interest” tax repeal and you will have a devastated commercial real estate sector giving back whatever small or better said minuscule gains that have been achieved so far.
13. Companies are not hiring nor will they when the Obamacare health law makes its ugly appearance on Corporate America’s balance sheets. Add now the proposed changes to the Accounting Rules whereby Companies will have to log on their balance sheets their leases as liabilities in the aggregate. Retailers will have to log their percentage rent even to the extent of forecasting their future gross revenue to be able to calculate their percentage rent exposure! Goodbye to long term leases. Which puts added pressure on already fragile financing…
14. The political climate in the United States can only be described as Toxic. It breeds lack of confidence which spills over into the Private Sector. The current administration is using Chicago style politics to create a leftist anti-business agenda which will not encourage companies to expand and hire until they see a change in political behavior.
15. The Gulf Oil Spill will have a devastating economic impact not just in the Gulf States but will be felt throughout the economy.
16. The European Debt Crisis is not going away, and the United States is heading in the same direction which again will hamper business expansion.
17. The only growth industry in the United States is the Federal Government. Our so called leaders have not figured out that the more you tax and spend the lesser amount of money is available for the Private Economy and for people and companies to spend.
18. Interest rates are low for the moment, however, when you begin hearing the Federal Reserve Presidents in various Districts talking about rate increases, let’s just say where there is smoke there is fire. These low rates are helping the housing market to some extent. But wait a minute…what about all the backlogged foreclosed shadow housing inventory that the NAR and Government forgets to talk about. That is artificially propping up house prices…but those same banks that are holding these foreclosed properties are being told by the Feds, just let them trickle out so as not to flood the housing market.
The cumulative effect of the all the above is why the commercial real estate market will remain extremely troubled despite what the propaganda says otherwise or whatever “positive” spin the industry tries to have you believe.