If You Believe All The Negative Hype About Commercial Real Estate, I've Got A Few Thousand Vacant Office Buildings To Sell You

Benjamin N. Dover III's picture

As the lone voice of optimistic reason on this naysaying website, it's my responsibility to intervene now and then to set the record straight for the benefit of all those benighted readers who don't consult reputable traditional media outlets like CNBC.

For months now, ZeroHedge (and unfortunately other bloggers and even some mainstream publications) have been warning of an impending commercial real estate meltdown that's supposedly going to crush banks, petrify credit markets, stall the economy's V-shaped rebound, and usher in an epoch of plague, locust, boils and the slaying of every real estate lender's first-born. Yet despite their continuous calls of "timber", the "commercial fake estate" tree refuses to fall. And just like an unheard tree falling in the woods makes no sound, if a borrower fails to repay but no one marks down the loan, there really hasn't been a default.


One of the wolf-crying anti-capitalists at the Wall Street Journal paints a grim picture: $1 trillion in mortgages backed by commercial property that's fast losing value, total losses on core CRE holdings reaching between 11.6% and 15.3%, or $115 billion and $150 billion, and the fact that more than 3,000 banks have more than 300% of their risk-based capital in commercial real-estate loans. And those are among the more optimistic of the pessimists' forecasts.

They also keep harping on certain macro-economic irrelevancies: businesses floundering, revenues flatlining, rents dropping and employees still being shown the door in droves (empty office space that most likely will be used by remaining employees to expand the size of their own offices). But none of those factors bodes badly for CRE. They're all what we experts call "lagging indicators," which means that they look backward instead of forward, and therefore can be safely ignored.

But more importantly, the doomsdayers are making the classic mistake of confusing subjective value with objective value. (Bear with me here even if you don't have an advanced economics degree.) These economic relativists think that a product only has value to the extent someone is willing to pay for it, i.e., to the extent that, in the subjective opinion of some prospective buyer, it has value. But we all know that's not how the real world works. Goods and services have intrinsic value. That's why FASB had the courage to yield to the greater wisdom of Congress and the banking industry and relax mark-to-market accounting. No market exists for CRE loans and CMBS, just like none exists for commercial real estate generally. But that doesn't mean that CRE, and the loans and securities that are derived from it, don't have value. They retain their objective value despite the fact that everyone thinks they're so worthless that they're unwilling to buy them at virtually any price.

A simple example illustrates the principle. Suppose I produce a giant steaming turd. Now if I put that turd up for sale, I probably wouldn't get any offers. Why? Not because my bowel movement is unsaleable, but because no market for it exists. Sure, the relativists will claim that the absence of a market is an indication (if not irrefutable proof) that my feces is worthless, but they'd just be describing its subjective value. Their opinion wouldn't indicate anything about it's all-important objective value. And since I produced the product, I'm in the best position to know its objective value and account for it accordingly.

So, for lack of a more palatable metaphor, the CRE market is analogous to a pile of crap. Just because everyone thinks it stinks doesn't mean it actually does. Because no market for it exists, we'll never know what it's true value is at this moment, which means that CRE lenders should continue to value their legacies at whatever price they subjectively believe they're objectively worth. Later on, that fetid stool I produced might just be used to fertilize a garden, and what seems like worthless shit today might end up smelling like a bouquet of flowers tomorrow. And that's what REITs and banks with CRE loans are doing. They're looking ahead to the brighter future of CRE, where today's turds are tomorrow's tulips.

"High-falutin' economic principles and academic theories are all well and good," the doubting Thomases like Tyler Durden and Contrary Investor will say, "but where's the proof?"

Right here, my scaremongering colleagues.  Exhibit A: The infallible discerner of jewel from junk, quality from crap, and objective from subjective value -- the equity market. Not only have the stock prices of REITs like Kimco skyrocketed since their March lows, they've been getting more equity financing than even Larry Kudlow ever dreamed possible -- a vote of confidence that proves that the credit markets that refuse to re-finance these REITs simply have no testicular fortitude. Why on earth would the stock market pour so much cash into CRE-related stocks if the CRE market were about to collapse like a mall of cards? Remember, there is wisdom in mobs crowds.

Exhibit BThe best judges of CRE value -- the major banks (along with the interdependent CRE analysts they employ) that have hundreds of billions in loans to CRE players -- have upgraded their outlooks on REITs and enthusiastically underwritten billions in equity offerings to them. The fact that the upgrades come within days (sometimes hours) of the announcement of a new offering and that the proceeds are explicitly earmarked to repay the REITs' loans to the underwriting banks doesn't suggest they're motivated by a glaring conflict of interest. It just means that the analysts' new recommendations are more current, and thus more reliable than their previous negative recommendations.

And who can blame them for seeing the light and becoming more bullish? The CRE market has nowhere to go from here but up.

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Anonymous's picture

If you think this guy is funny then you should read this jokers comments. Priceless


Missing_Link's picture

Pure poetry.  Well played, sir, well played!

Anonymous's picture

No one wants your crap? There must be a market for it somewhere, therefore it has value, somewhere?

Only in the greater, greater, greater FOOL theory...

Oso's picture

love it.  perfect analogies!

Silver Bullet's picture

Nice work Mr. Colbert.

arnoldsimage's picture

pete stark... " you don't fucking understand, jan. the more worthless cre we have, the wealthier we are. what fucking school did you go to... idiot. i ought to throw you out the fucking window."

gookempucky's picture

KA KA fuckin funny-great stuff ---MN you left off lickety split

ZerOhead's picture

Kudos Mr. Dover Sir!

I shall forward this to our very nervous mortgagees... I am certain that they will feel very relieved. Kudos!

Nictrades's picture

Utterly brilliant and perfect for a holiday weekend. 

Nice one ZH and Mr Dover ;)


McLuvin's picture

Ben, thank you for your insight.  Like you, I've been quite puzzled by all the pessimism found on this site, but have not been able to articulate my thoughts.  Sometimes I feel that my life partner Steve Liesman and I are the only ones that truly understand.  I too, am an occassional producer/collector of steaming turds, so I thought we might be able to structure some kind of a deal, as I feel an affinity towards you.  Would you be willing to carry a note on your steaming pile if I commit to a 20% down payment?  I have an investment banker friend that could securitize that note for you as well should you not want to hang on to it till maturity.  He has many private equity clients that have been trying to hedge their exposure US Treasurys, and I think that CDOs of steaming turds, although very highly correllated to Treasurys, can diverge in the near to intermediate term.  If you are interested, please email me at larrykudlow@hotshemale.com.

Anonymous's picture


20% down payment? are you crazy?....what
dinasaur finance did you learn?

i am expecting a more heavily engineered cds
(credit derivative shits) more in the ninja
style - none of that down payment crap...

call pom pom queen larry when you get it right - he will
handle sales...

MinnesotaNice's picture

Hysterical...  now we have Mr. Dover, Mr. Gramm, and now McLuvin... perfect!

Anonymous's picture

putting up silly parodies on this site makes it less useful for people who come here to get information. this contains no information and I thought this site was not an entertainment site.

MinnesotaNice's picture

Clearly you were wrong... the site lives and breathes sarcastic humor...

Anonymous's picture

blow it out your ass bitch

walküre's picture

It's interesting that anyone wouldn't get the sarcasm but still able to answer the Captcha question.

Could be either accountants or engineers posting here?

Anonymous's picture

Better than Mogambo Guru! Maybe the best post so far on ZH.
Never laughed so hard. The truth stinks, alright!

Joe Sixpack's picture

"Later on, that fetid stool I produced might just be used to fertilize a garden, and what seems like worthless shit today might end up smelling like a bouquet of flowers tomorrow. "


Wall Street understands:


Turn your lie-abilities into an ASSet.

Anonymous's picture

I'm with Z.

There is so much debt, there are so many too many retail and office buildings, and there is so little demand. All of these properties should be priced realistically. I live near Lowell MA. Let me tell you about distressed real estate values for an entire city - they fell fifty years ago and have yet to come back. You can get old office space for a song.

By the way, in Detroit, hasn't the old Packard plant resisted all attempts at modernization. If the economy is in bad shape, this distressed real estate stays bad as well.

I have no idea what banks and REITs are up to, but there sure is a lot of commercial real estate that is basically worthless out there.

Rusty_Shackleford's picture

"And just like an unheard tree falling in the woods makes no sound, if a borrower fails to repay but no one marks down the loan, there really hasn't been a default."


I'll just tuck that little piece of gold away for later use.

Brilliant.  Love it.


Unfortunately, that simple point seems to be the central theme in the current conflagration.  I can just see it in my mind.  All the powers that be are seated around a table.  Brows are furroughed and tiny drops of sweat are forming on every neck in the place.  Someone pipes in and says, "What if we just ignore it and just tell people that everything is fine.  We'll use the Fed and the banks we bailed out to ramp up the stockmarket; and everyone judges the economy based on government reports and metrics, right?  Well, we're the government right?  Let's just make the reports say what we want them to say.  It can't lose.  We'll bring back prosperity just like those cargo cults brought back the B29's and John Frum"


Anonymous's picture

Ok, let me get this straight, we are now living in a satire?

aldousd's picture

Stephen Colbert says "No."

djchill2's picture

I can' t say enough about this article...simply fucking hilarious...the real shocker though is the comment stream...come on space monkeys....get your shit together....I doesn' t get anymore sarcastic than this!

Anonymous's picture

Great article! You had me going, albeit dubiously, until the "wisdom in mobs" bit. Obviously you've fooled a lot of other people completely.

I totally agree with #58644 - change the pile of crap analogy and you've got a list of talking points ready to be repeated on TV or on the CRE brokerage firms' sales calls.

"If a borrower fails to repay but no one marks down the loan, there really hasn't been a default."

Unfortunately, this is the approach that the CRE firms and banks are actually taking - a friend of mine works as a CRE broker, and the line I've heard is this:

"A rolling loan gathers no loss"

They actually believe this and think this approach is sustainable. Ridiculous. Unbelieveable. Absolute rubbish, laddie!

Finance Hype:

MsCreant's picture

"where today's turds are tomorrow's tulips."

Nah, todays turds are today's tulips.

FredFubar's picture

Fucking brilliant. I realy enjoy Ben's posts.

Anonymous's picture

rotflmao...always wondered where green shoot fertilizer was coming from....

Anonymous's picture

ABSOLUTELY your best work yet, Ben. It takes a rare talent to take a kernel of truth and create a right-brilliant skewering. You might be finance's Samuel Clemens.

On the other hand, to the various anons that disagree with Ben's very cogent post, I'd like to point you to a new multimedia outlet called The Onion (www.theonion.com) you might want to check out. The Onion always seems to be first with any major story, and I recommend that you trade based off their news.

Anonymous's picture

Although I'm anything but a "green shooter," CRE will have value again some day (after the Greater Depression). Your teaming turds will never have any value except for, perhaps, compost. That's the fallacy in your argument against intrinsic value.

Anonymous's picture

cre has value now....it's just not as high as
it used to be....and how many years do you want
to wait before it returns to those highs?

i'm betting on the turds...

Anonymous's picture

Best piece of prose I have read on this thread. That was beautiful. The crap analogy was priceless.

Anonymous's picture

Ditto for Nashvill, Atlanta, and Chicago. Commercial "For Lease" sign are popping up new everyday. The author must live in a Manhattan condo. The real worls is out there.

pooplagrande's picture

Wow...that is hardcore sarcasm....adult rated.

BTW, I was recently in Orange County (and the surrounding areas)...I have never seen something so depressing in my life. There were For Lease signs every 30 yards in some areas...even "Free Lease for 6 months" signs. Yikes...

Chumly's picture

Add once affluent North Scottsdale (everything north of Camelback) to that list - quite remarkable.

Anonymous's picture

Every underwater CRE developer would love to have some flight skilled middle east terrorists eyeballing his towers right now. Get some of that sweet insurance money, so long as they're backstopped and he has an ironclad contract.

They'd prolly underwrite the flight schooling for that.

Anonymous's picture

Mr. Hanke, and the cast and crew of South Park, salute you!

Headlines reported a $4 billion dollar drop in 1-30 delinquencies but 99% of this is attributable to one company that reclassified all such delinquent loans as "interest only".
Luckily, this mega corporation is already under bankruptcy protection and highlights the irony of their push "Forever 21".

If only I could delude myself and shove my fat ass into into that belief!

Hondo's picture

That was a load of crap.  The reason equity REIT holders are allowing themselves to be diluted is that they are told by the REIT scammers that they are going to use the monies to buy a pile of crap at 15 cents on the dollar and it will rise to 30 cents on the dollar and....presto we'll make you some money to offset the loses we gave you earlier.

They analyst are scam artist.........give me a break haven't you analyzed anything!  The relationship between the debt holder (who also employs the analyst) and the REIT and the upgrades they get right before they toast you....I mean dilute you.

I've looked at many recaps in the last 6 months all the majority have failed based on too much of kool-aid drinking.  This sector is hurting badly and there is very little new capital going in except at distressed prices.

As deals fold because of insufficient cash flows this puts pressure on surrounding property to lower rents which feeds on itself until everyone has adjusted their rents and costs to compete with competitors.  This will take a while to work through but believe me it will continue to flow down hill.



Anonymous's picture

So, scam the scam artists

Dr Horace Manure's picture

As an international expert in pre used equine food, I believe Mr. Dover should use my wife's name, Piza Manure, as his nom de plume.

texpat's picture

Solid, sensible analysis. Expect further and continuing REIT upgrades as the economy recovers, and people get back to work and spending.

Indeed, we can see from the birth/death adjustments that this is already happening, although the adjustments are distorted downwards by job losses in the real economy.

DaddyWarbucks's picture

Real information and great writing. You just can't beat ZH. By the way, I suggest a double latte enema to enhance that GST value.

dnarby's picture

...And don't skimp on the cream!

Anonymous's picture

Great piece. Just add a bit more sarcasm the next time, so everybody will get that you are in fact joking.

Anonymous's picture

The Irvine Company located in Southern Califoria is a large commercial property owner, Bren, Gross, and other competent people are involved. Over the past several weeks they have defaulted on numerous large commercial buildings in Orange County and San Diego County due low cash flow from rents. Businesses are moving out! This is objective, this is real, this is not a subjective value that has no market or is not tangible. The Irvine Company is a well run institution. If this company is starting to default your subjective econ POV does not hold water, no matter what pump and dump processes Wall Street is providing for REITS. It is possible spring 2010 will provide another leg down on both commercial and residental real estate in the US. I hope not. I hope there is light at the end of the tunnel and not a bunch of moldly old builtings that smell like !!! and are objectively generating negative cash flow for the next ten years.

Strom's picture

Ah! I found it. They're not in default, but Fitch is concerned they will default. See:


They responded by basically saying, "We haven't defaulted in 145 years, and won't now". We'll see what happens...

Strom's picture

Where have you seen the Irvine Company defaulting?  Link? They own many of their buildings all-cash and the company is privately held and very low-leverage, so I would be surprised at defaults.

They're also the 800-lb gorilla in OC and can buy tenants...or just wait.

tradertim's picture

"Suppose I produce a giant steaming turd. Now if I put that turd up for sale, I probably wouldn't get any offers."