Commercial Real Estate (CRE) Financial Armageddon, Part Deux ?

Question

Hello:

1. http://tinyurl.com/CRE-Bubble-Burst

2. http://tinyurl.com/11-Trillion-Bubble

The above mentioned two articles paints a dismal future for Commercial Real Estate (CRE).

I was hoping a learned members here who are Investors/Economists connected with CRE can throw some light on What does it means to Real Estate in general and educate the fellow BP folks.

The following are few questions that come to light :

1. Who bails out the banks/Insurance companies if the Commercial Backed Mortgage Securities (CBMS) collapses in Value when the underlying asset looses value?

2. What happens to Millions of Retail Space, will they be re-zoned for other uses? Rezoning increase Inventories of its class, which mean deflationary pressure on $ price/sft ?

3. How ? will Cities and Municipalities cope with revenue short fall that CRE in their respective communities were generating , What will its effect on the Bond Rating for Municipal Bonds of such communities.

4. Will it mean uptick of more Municipalities filing bankruptcies, cause a deflationary pressure on Home Values, will it wipe away the gains made post Financial Armageddon Part I in 2008.

5. Will the real estate holding companies holding millions of SFT on their portfolio be able to sustain and find alternate re-financing.

6. What impact does this situation have on Banks lending for smaller REI to Commercial and Residential Real Estate Market?

Pl, abstain from trolling making disparaging, denigrating and disingenuous comments

I appreciate in advance comments that provide other differing views and insights to all readers alike.

Thank You

Sincerely

Kishore. P

Andrew Johnson · Answer

@Kishore Pathanjeli I think you're focusing on retail as a proxy for "commercial real estate".  Is demanding for healthcare offices going down?  Is demand for commercial residential real estate slowing?  Is the demand of office space slowing down?  Cities will still collect sales tax revenues from online purchases.  If an old Macy's is re-purposed into a movie theater there will still be traffic.   And it doesn't look like malls/retail spaces are really suffering all that badly in high-demand areas.  If you have a mall is a crappy area, with a declining population, I'm sure that online shopping will hasten the kill but South Coast Plaza in Orange County is still a horrible place to park on Black Friday.

Side note, if municipalities are filing bankruptcy it's less about revenue shortfalls and more about retirement funding and pension obligations that create those shortfalls.  After all, property values have been rising so there should be an increase (slower in California) in those revenues.

Now if you're REIT is focused 100% on retail, highly leveraged, and in some "up and coming areas" I could definitely see some challenges there.

Account Closed · Answer

STNL

Account Closed · Answer

@Joel Owens.. Can you give a rundown of your favored "internet resistant tenants" that could be had inside of the Retail space, NNN or NN, for less than $3MM?  Particularly in the next 2-3 years?  My mind goes to QSRs, but would love your view.

Joel Owens · Answer

Depends on STNL versus MTNL investments.

Andrew Johnson · Answer

@Kishore Pathanjeli It gets crazy complicated when you try to mix shifting demographic trends with a decline in retail with commercial loan interest rates resetting with municiple solvency with...with...with...mixed across geographies to come to a single conclusion.

Either that or I lack the skill to figure it out...

Kishore P. · Answer

@Andrew Johnson : Appreciate your insight and Thank you for taking the time to respond and post here.

Kishore P. · Answer

@Joel Owens, @Andrew Johnson: Appreciate you Joel for moderating this forum and post, so in both your assessment, If I were to make a stretch here:  shifting population Demographic/Density will open up new opportunities with repurposed retail space. Reading the News Editorial one comes away with not so rosy picture. Glad to note that yourself and others out here still take the contrarian view and see opportunities galore !

BTW, I just got my State of Michigan Salesperson license last week and looking into Commercial Real Estate and my plan is to continue my education in Real Estate and hang my license with Commercial/Residental Broker. There are so many avenues in Commercial Real Estate my head spin sometimes.

Thank You, both for insight.

Joel Owens · Answer

It's a bunch of doom and gloom not founded in reality.

Over retailed is in areas that never should have been built to begin with. Old buildings in areas with limited land are in extremely high demand for redevelopment.

Not just the asset class but the brand of the business and the history and experience of the operator along with location make a big difference in the success of the venture.

Clothing stores have been taking a dive going on about 7 years now. Those in the industry have know it for a long time.

I can tell you I transact retail daily and I know the market better than most and my business is amazing year over year. A lot of that CMBS wave never happened. Values improved to a point that the borrowers were able to keep the asset performing. There are a few legacy loans here and there but not the massive opportunity people thought. Old malls have been croaking for awhile but if location is good can easily be re-engineered for tenant mix or torn down and something else built in it's place.

These days I focus on and my clients internet resistant tenants for mixes of a center.

Commercial Real Estate (CRE) Financial Armageddon, Part Deux ?

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