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If You Believe All The Negative Hype About Commercial Real Estate, I've Got A Few Thousand Vacant Office Buildings To Sell You
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.
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 B: The 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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Ben apparently never placed his turd out on e-Bay.
did it have jesus's face in it? Thats a guaranteed $1,000 right there!
LOL I thought that was just a bubble phenomenon. Maybe that's the answer. When people have too much money turds have value. When they don't suddenly no value. Isn't it a wonder what the cornacopia horn brings to our society.
Superb. I wonder how many financial experts would read this (if cleaned up a bit )and find it to be persuasive analysis. Look at the number of readers here who don't get it. Amazing.
I have a analogy for the giant turd. Japanse are buying freshly worn parties of 16 year olds out of a vending machine. Never thought that there would be a market for that.
I believe you meant to say 'panties'.
And it's true, and has been for years - no shit. Japanese women can't hang their panties out to dry on their 16th floor balconies with the rest of their delicate-wash stuff because some sick bastard will climb the side of the building to steal them.
There's quite a market for used panties in Japan. I was in Tokyo about 10 years ago and saw these vending machines on the street corners selling shrink-wrapped packages containing aforementioned used panties with a small hardcore porn mag. Nuts!
At first I was worried that you fell and hit your head while watching CNBC.
heeheehee.
Thanks for the chuckle, Ben - outstanding work.
I don't know what's funnier - the terrific article, or the humourless dolts who couldn't recognize satire if it hit them in the ass with a banjo.
"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."
ROFL...
Awesome piece. Surprised at how many people don't get it.
I agree...I was laughing my ass off all the way through it...until I saw the comments....unreal that alot of people here could not see the sarcasm in the writing.....simply fantastic piece!
Wow....one of the funniest pieces that I have seen on ZH....extremely well written.
Absolutely fantastic! Thanks for a good start to the trading day.
I second your notion.
This has to be BY FAR the stupidest thing I've read on ZH.
Everyone has a right to their own opinion... but in my opinion you clearly have no sense of sarcastic humor... there is a segment of the population that cannot recognize a pile of steaming sarcasm when they step in it... and I think you might be one of those people... you might want to have that checked out during your next doctor appointment.
Mr. Dover you are one of my favorites... along with Phil Gramm... who I have a sneaking suspicion might be related to you.
where has mr gramm been lately? has he gone off
to pakistan to bomb taliban holdouts?
As much as this WAS a piece of sarcasm, there's a tremendous amount of truth in it. We're being told that the home sales market is "rebounding", even though a large portion of sales are simple foreclosures being purchased for pennies on the dollar.
In addition, banks have been incredibly lenient in terms of working with foreclosed upon homeowners - expecting a horrid political backlash if they are too harsh.
There IS an objective value to all this stuff, and in the short term it CAN drive prices. Reality can take time before it settles in, but as Keynes said "the market can remain irrational longer than you can remain solvent". And since time is what we need to remove the issue of leverage, this kind of obtuse "objective value" may be all we need to reach that point of balance in leverage.
But probably not.
So how much CRE you sellin' then? Bwaa-haaa-haaaa
We need more writers like Ben Dover (love the pseudonym)
I hear singing in the back ground. It's Joel Grey...
"Welcome to Cabaret..."
You must write as Phil Grahm too.
Hahaha. Nice!
Well I don't have an advanced economics degree,
but I did take an engineering class - and one thing
I learned was that if you keep putting stress on a
system, eventually it breaks.
there's so much stress on this system, it has vaporized. that shouldn't stop anyone from bidding up the assets though.
The first clue this was sarcasm was the author's name, "Ben Dover'. Ummmm.. duh.
Incest, incest, incest. And people make jokes about West Virginia. The CRE market from top to bottom is filled with incompetency and a complete lack of ethics. "The ethics of, uh, business..."
So simply put, let's get the public to buy our toxic assets and suck all we can from Joe sixpack before we close the bar.
Au contraire. Completely accurate, and as one who is actually in the real estate business, the rumors of vacancies, mailed in rent checks that are down 50%, utterly worthless acquisition and development loans on parcels that will never see daylight in any reasonable time frame, is all true. Right now, today, all of these loans, and their holders, servicers, borrowers and lenders, are holding their breath, and simply hoping a brighter day awaits. Worthless assets that should be written off are instead being held in abeyance, pending . . . something. There is no other strategy. End of the world? Of course not. But a failure to deal with reality - absolutely.
I'm not a financial expert. But could you or someone explain well to me just WHY the "worthless assets" that are "held in abeyance" CANNOT (or can they?) come to profitable life (possibly through some kinds of swaps) if the economy is indeed jump-started? If specific debt entities are indefinitely not written down, can the system recover? Is the fact that the assets are obscure and hidden a catalyst or a hindrance to recovery? Or are the assets a mixture of both catalyst and hindrance?
-AnonymousZero
You can't jump start something that cannot sustain itself, hence FASB157, Fed ramping up equities, and all the other smoke and mirrors are used to provide the appearance that all is well.
Those of us with fine-tuned rare earth metal skull caps know we are freaking doomed!
Astute observation Chumly!
You should have ended this piece of nonsense after you produced the first steaming turd.
Its called sarcasm.
It's hard to tell that this is sarcasm b/c there's an equal amount of similar idiocy (all over the web and tv) written by people who actually take that type of logic seriously.
yeah...they voted for either BarriO (or less likely) McAmnesty
I agree. He'll need to be even more hyperbolically sarcastic if he doesn't want to confuse people, BECAUSE THIS IS STILL TOO CLOSE TO WHAT WE SEE IN THE MSFM EVERY DAY! O_x
10-4, but ALL of Ben Dover's posts are dripping in sarcasm. Ben is the good humor contributor to ZH.
Benjamin Dover...... Ben Dover.
You guys are thick.
"Bend Over" maybe? The guy is satire from the beginning.
Thanks for explaining that, you must be really clever to figure that out.
-Guy who hopes poster #58536 will get MY sarcasm and realize how little I think of him/her.
"benighted readers who don't consult reputable traditional media outlets like CNBC."
After that line, I knew he had to be joking........hahaha
bravo.
Yeah, well justify this....
http://www.google.com/finance/domestic_trends
Very handy tool... thanks!
That was funny :p
Ben, That was Good one and I think you should send this article to Banana Ben.