This article Analysis of: Real Estate Revival Seen by Fund Managers – The Street in which this writer obviously had NOT done his research properly is acting more as a “Shill” for the Wall Street Fund managers than providing accurate and honest information.
For example the writer has the following quote from Marc Halle, manager of Prudential (NYSE:PRU) Global Real Estate(PURAX). “Many markets are strengthening, and we should have good demand for real estate for at least the next three or four years,” he says.
This person can’t be saying this with a straight face.
The fact is only about 5 major metropolitan areas in the entire United States are seeing anything which could be considered an uptick in investment sales activity. One of these cities is Washington DC, and according to a couple of recent articles one from Costar (NASDAQ:CSGP) and another from Reuters which says although there is lending competition for the buyers of these investment properties, it is for only fully leased trophy properties and only those inside the Beltway. That is an extremely finite Universe. What this fund manager does not say is what are the lending parameters. We already know they are as stringent as ever with LTV’s of 55%-65% and DSCR of a minimum of 1.25.
5 cities does not constitute “many markets”. So the buyers in even in these so called “strong markets” are cash buyers and mostly foreign entities.
Next the writer says the vacancy rates have shown improving numbers by .2%. That is statistically meaningless. Lastly Mr. Halle says the commercial real estate downturn
“is proving to be shorter-lived than the last property recession, which began in the late 1980s. In that cycle, real estate prices fell steadily for more than five years.”
How can that even be said at this time when the downturn is still in progress?
What Mr. Halle and the writer of this article neglect to bring up is the fact that all economic signs point towards a double dip recession. The Federal Reserve is uncertain as to the actual direction of the economy. This is due to the sustained unemployment rate which by all accounts is not going lower, but higher. Businesses are paralyzed in their decision making as are investors. The income tax increase uncertainty is helping cause this paralysis along with new financial and health care regulations which are to yet be written never mind implemented.
Vacancy rates will NOT see any significant reduction due to the sustained high unemployment rate. Already retails sales have slipped which does not bode well for the Shopping Center industry which then trickles down to warehouse and distribution sectors as well as manufacturing albeit this sector has shown some improvement due to rebuilding depleted inventories, but this too will wane in the near future as demand drops for more goods.
The lenders holding Commercial Real Estate loans are in the process of kicking the can down the street in hopes of better days ahead. This is the ‘Extend and Pretend” mentality that is holding back commercial real estate properties from coming to market, be they at much lower prices or not. This is a house of cards which by its very nature is fragile at best. It won’t take much to blow the house down.
Also in the mix is the recent decline in housing sales and pricing over the last few months. You have the two large and bloated GSE’s about to be dismantled by Congress while at the same time they are sucking continuously huge chunks of cash out of the US Treasury (Tax payers that is).
There is no doubt there has been some minor “improvement” but that is overblown hype by those who are trying to game the market in order to increase sales. Is there some activity both leasing and sales, yes, but it’s very minimal. Nothing was ever at a complete standstill. Also we are still closer to the bottom than the media wants to portray. This economy will bounce along the bottom for the near future as the new “Normal”.
I would suggest that if any investor who has been in the REIT sector within the Stock Market and has experienced the gains spoke about within the subject article, cash your chips sooner rather than later since there are those that think once again the only way the market can go is up…
There are way too many negative variables for an article like this to be published stating the recovery of the commercial real estate market without what should be the prerequisite disclaimers in my opinion.