Is Commercial Real Estate Recovering?

Econophile's picture

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Edward King's picture

CRE ticked up in Q2 but activity is again just about dead outside of REITs doing hairy/horrendous deals.

Magua's picture

There actually two parts to commercial real estate:

Public Reits have issued equity and gotten their balance sheets into pretty good shape, albeit with the dilution of their long term holders, including the founders. They are beginning to nibble at properties, like the Boston Property example above when they can find properties. Boston is perhaps the most conservative Reit in the office space, so they don't commit a billion lightly, but obviously the property is an irreplaceable asset in Boston. I actually like Reits in a dollar printing go wild world, as the rents will move up and cause a improving cash flow trend. Hopefully dividends will soon follow, so buying a high quality Reit with a 3% to 6% yield growing 2%-3% a year will give a nice return compared to Treasuries.

Private real estate is another matter. Most of the properties were bought with at least 75% leverage, and are underwater with no equity. Some sit on the balance sheets of banks. Vintage private real estate done from 2005 to 2008 is going to be a black hole for pensions, endowments and insurance companies. Also unlike Reits, they bought for price appreciation, not cash flow, and do not have the professional management/leasing staff to manage the properties, and like the homes sitting fallow in Florida, money must be put into the properties every year to keep them marketable.

What I am not sure of, is whether the eventual sale of them will drive cap rates up a lot or at all. If interest rates stay low, then my guess is not much, but if interest rates surge, there will be blood in the streets.

tony bonn's picture

interest rates will be the party pooper....the fed can keep rates artificially low so long as irs don't explode...unfortunately the day of reckoning is coming for those too....cre is dead - but cleaning the books is a sign of potential life.

kaiserhoff's picture

Not recovering and won't ever.  The classic example is Amazon.  They've never made any money selling books (other stuff, maybe), but they were hugely successful at destroying margins for all the mom and pop book stores.  Same thing applies throughout retailing, except for food, furniture, really bulky stuff.

As for office space, why not use Starbucks? 

I am more equal than others's picture

As a CRE appraiser I can say that the CRE market is not recovering.  This is REITards chasing yield.  This will wip-saw as things fall apart and interest rates invert.  Expectations and reality rarely meet but when they do it is usually painful. 

greyghost's picture

do you know if the bad boys have done the same thing to the cre market that they have to the housing market...ie bad loans, faulty paper work, slicing and dicing mortgages...etc...etc

Chartist's picture

Forget real estate.....Here's the fucking problem:  I just received my contract renewal from my HMO.  My contract just went up 25% over last year!  There will be no expansion and no hiring among small business owners when this shit keeps hitting us where it hurts.

And, I now have much less money to spend in other sectors of the economy.  Does this fucking government want to support only the HMO industry?

kaiserhoff's picture

Amen.  Thanks to ObummerCare everyone will need another HR flack, another compliance officer and two or three accountants just to stay out of jail.  WTF

taraxias's picture

"Is CRE recovering?"

 

One word: "NO"

mynhair's picture

'Is CRE recovering?'

Not based on my monthly check.

Chartist's picture

I love ZH, it's the only source of business info I read....But, you cannot trade stocks using this information....

Dark Space's picture

You're problem is that you're trading stocks...

mynhair's picture

Yes you can, just get yer nose outta those worthless charts.