Why should this matter? Is this a case of so goes NYC so goes the rest of the Nation?
As reported by the WSJ…Commercial Property Sales Plunge In New York City
Why is the news that NYC commercial real estate sales have dramatically dropped so important to the rest of the country? The simple answer is that if this is happening in NYC then what does it say about the other, potentially less fortunate, markets.
The real issue is what the article is saying about office rents. They are stagnant at best, “With such high occupancy rates ‘there is very little upward pressure on office rents,” said Barbara Byrne Denham, chief economist of Eastern Consolidated, in an interview. The article goes on to report, “According to data firm Reis Inc., effective office rents in New York City are still down by 17% from 2007 and office vacancies remain high at 10.5%.”
What many outside the commercial real estate sector don’t realize is that there will be a tremendous amount of CMBS and Conventional Mortgages coming due this year as the 5 year loan terms come due. Therefore the questions which have to be asked are:
1. How will these loans be paid off?
2. Will the lenders continue with their policy of ‘pretend and extend?’
3. Due to the decrease in the overall value of the properties from the 2007 peak, where will the equity come from to pick up the difference
4. How stringent will the lenders be with the LTV’s, debt service ratios and so forth?
With National Unemployment remaining high and the housing market still very weak, there is no real demand for occupancy levels to go up. There are those that will be trying to put a pretty face on this set of circumstances but reality will win out in the end. Lastly, the Federal Reserve and the Federal Government are tapped out, so I doubt relief will be coming from them. Add in the Dodd-Frank bank regulations and the recent articles about the uneven enforcement by banking regulators and examiners and we have a terrible mess to deal with.
With The European sector going into financial ruin, this just adds to the upcoming misery index. Anyone who takes the slim amount of good news or the stock market’s schizoid behavior as positive signs is not dealing with reality.
As I said over a year ago, and continue to say, as the housing market goes, so goes the U.S. economy. With the unemployment situation the way it is, the housing market will not be making any sort of a comeback to the degree that is needed anytime soon.
There was an article written recently by Mike “Mish” Shedlock for Business Insider…
http://www.businessinsider.com/mathematicall-structurally-high-unemployment-2012-1 which made the case that chronic unemployment will be with us for the next 7-12 years. Did someone say another lost decade, such we’ve seen in Japan?