The Next Domino To Fall: Commercial Real Estate

Tyler Durden's picture

Via Charles Hugh-Smith of OfTwoMinds blog,

Unless the Federal Reserve intends to buy up every dead and dying mall in America, this is one crisis that the Fed can't bail out with a few digital keystrokes.

Just as generals prepare to fight the last war, central banks prepare to battle the last financial crisis--which in the present context means a big-bank liquidity meltdown like the one that nearly toppled thr global financial system in 2008-09.

Planning to win the next war by assuming it will be a copy of the last confict is an excellent strategy for losing the next war. The same holds true for the next financial crisis: reckoning that it will be a repeat of 2008 is an excellent way to be caught completely off-guard.

Crises may rhyme, but they don't repeat. The next Global Financial Meltdown won't start in subprime mortgages--that sector has been wiped out, written down, or passed on to the poor tax-donkey taxpayers.

The next crisis also won't arise on money-center banks, either. Central banks have figured out how to bail out the banks, and have rebuilt the bank balance sheets by stripping hundreds of billions of dollars in interest from savers.

(Sorry, widows and orphans--your interest income had to be transferred to the big banks. We're sure you understand why the banks are more important than you are as you enjoy yet another meal of canned beans and saltine crackers.)

The central banks and state treasuries around the globe may be confident they can bail out the banks, but what if the next domino to fall isn't a bank? What if it is a "safe, high yield asset" held by institutional owners such as pension funds, insurance companies and REITs (real estate investment trusts)?

What if the next crisis isn't a spot of bother caused by excessive leverage, but a systemic collapse of collateral as an entire sector--retailers holding millions of square feet of bricks-and-mortar store space--falls off a cliff?

Consider this chart of sky-high commercial real estate (CRE) valuations...

and this photo of a decimated major mall...

and this partial list of retail closures, some due to bankruptcy, others due to downsizing, and others that claim to be downsizing but are actually the initial stages of liquidation.

Talk about an overvalued market set up for a fall. It isn't just malls becoming empty retail wastelands--it's Corporate America shifting to flex-work and work-at-home, slashing the need for floor after floor of costly business-park office space.

It's about restaurants moving to smaller spaces as they move to serving more meals via delivery services.

Commercial real estate is grossly overbuilt in retail and office space. Combine sky-high valuations with cratering demand and billions in short-term CRE loans that must be rolled over into new loans, and we don't have a liquidity crisis, we have a collateral crisis-- the assets supporting the debt are no longer worth the loan balance.

Unless the Federal Reserve intends to buy up every dead and dying mall in America, this is one crisis that the Fed can't bail out with a few digital keystrokes. Gordon T. Long and I discuss this brewing crisis and its potentially devastating consequences in our program Is Retail CRE The Next Financial Implosion? (YouTube)(34:12).

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USisCorrupt's picture

I'm with TRUMP !

 

Try ALL REAL ESTATE !

BigFatUglyBubble's picture

A BAT will deliver the final death blow to an already very weak sector.

FireBrander's picture

Local large Mall went bankrupt in 2009 and a new owner stepped in.

Began a total remodel in 2012.

Stopped the remodel in 2013...what a mess...it's a sad place, half of it is closed off for "remodeling" that stopped for 4 years ago. If you want to walk from one end to the other, you have to go outside as they started the "remodel" in the center of the mall. Occupancy has to be less than 50%.

Another mall has gone total ghetto...that will be a dead mall soon as two high end anchors have left and now I see smaller stores folding too...domino effect.

Third mall is nice, but traffic is always, even at Christmas, what I would call very light compared to the 80's/90's high points.

Fourth mall is where it's at...top-o-the-line in the middle of the wealthiest part of town; seems to be doing just fine.

So, 50% of our Malls are toast, 25% are "hangin in there" and 25% are fine (on the surface at least)....another Bush level economic collapse and this will be a 1 Mall town.

CJgipper's picture

When the valuations fall back to reality (or below), there is money to be made by making these things into indoor communities for retirees and assisted living.  Most of the square footage can be turned into apartments or condos, then you have the shops as doctors offices, grocery stores, etc.  You even have the chance to help with dimentia and alzheimers in a more controlled facility becuase those people can remain independent while you already have the infrastructure in place to make sure they don't wander off while giving them their freedom.

Thinking big, there could be some possiblity here.  However, the fed will step in to prop up values, and the prices on these things won't fall fast enough.  They'll fall into disrepair so that the economics of remodeling no longer work out due to the cost of fixing the common areas back up.

cheka's picture

cre = heavy skype.  so too big to fail.  frbny will make sure holiday bonus pools are well funded

prime american's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... http://bit.ly/2jdTzrM

Escrava Isaura's picture

2017.

And American business failing by no other reason than pure ignorance.

Now, because of this level of ignorance the worse is yet to come.

Let me show you the end game in 3 minutes: Bankrupt small banks and firms and move the money to the Stock Market. Highly recommend that you watch these 3 minutes few times to really sink in.

https://www.youtube.com/watch?v=p5Ac7ap_MAY#t=1h02m15s

"All the perplexities, confusion and distresses in America arise not from defects in the constitution…, as much from downright ignorance of the nature of coin, credit, and circulation" — John Adams, August 25, 1787.

 

N2OJoe's picture

Is the author suggesting that the Fed wouldn't or can't step in and buy up all the malls in America???

CrabbyR's picture

Thats an elightening video...saw it a while back , definitely worth watching twice , gives more perspective to whats occuring globally and here currently

Misean's picture

You're obviously not up to speed on building codes.

Lovin-ZH's picture

You have a point, but at some point, those local politicians will want to shore up their declining real property tax collections by flexing zoning and building codes.  Let's hope that happens soon enough.

SmokeyBlonde's picture

Building codes can be changed easier than the global fiat fuck-up that initiated this situation in the first place...

Doug's picture

True.  Some malls can and will be repurposed for community uses, but most will be toast.

USisCorrupt's picture

I do LOVE my Farmland, people will always need food.

Houses Depreciate's picture

There is a globe full of land where 95% of it goes undeveloped. Land is essentially worthless dirt.

Misean's picture

Yes dirt is worthless with out man and his directed energy. Takes time to make dirt farmland. Makes your response here kinda stupid, no?

Houses Depreciate's picture

Yet land is nothing but dirt is still worthless. If you paid $500 an acre, you got ripped off.

Doug's picture

Still over $500 per buildable FOOT in Manhattan.  

Doug's picture

Assuming a 10.0 FAR, an acre of land in Manhattan, at $500 per bsf, is worth $217,800,000.  Just sayin'...

Houses Depreciate's picture

Yet there is a globe full of land where 95% of it goes undeveloped. Land is essentially worthess dirt.

SmokeyBlonde's picture

Spoken like a good EMEA or African house-boy ...

gespiri's picture

What if we turn all these dying commercial buildings into farmland like it was before all this urban development?  More green spaces, more self sustenance.  Look at Europe which has a balance between the two (except all the migrants that are ruining it).

Friedrich not Salma's picture

The Talking Heads:

There was a factory
Now there are mountains and rivers
You got it, you got it

We caught a rattlesnake
Now we got something for dinner
We got it, we got it

There was a shopping mall
Now it's all covered with flowers
You've got it, you've got it

If this is paradise
I wish I had a lawnmower
You've got it, you've got it

Fashy_Farmer8814's picture

That's my goal too. Being a food producer.

HRClinton's picture

Big deal. There will always be sellers and buyers.

Just like there will always be big fish eating little fish, and wolves preying on sheep. 

"The End Is Near".  LOL.

Boris Badenov's picture

"Gordon T. Long and I discuss this brewing crisis..."   

There's your answer! Turn the malls into breweries and bring down the price of beer. Beer is good food.

BigFatUglyBubble's picture

It should be exported, not consumed.  Malls are going to become dystopian squatter mini citities anyway. 

canisdirus's picture

Suburban housing is already headed this way. Malls turning into high density squatter housing would actually make a lot of sense.

chubbar's picture

Most of the malls in the cities, with the exception of those located in the very highest priced neighborhoods, I wouldn't go into without an uzi. Bunch of lowlife gangsters hanging out harassing shoppers and pretending their lives are meaningful.

cheka's picture

you must be from houston - you described the malls perfectly.  no-go zones...unless you are la raza or black lives terrists

markpower49's picture

Mexicans and especially blacks are a cancer upon this nation. They ruin where ever they go.

canisdirus's picture

Sounds like Sacramento... Those are the scariest malls I've ever had the misfortune of entering.

silverer's picture

The next military training camps.

gespiri's picture

Liquid bread, baby!!!  YEAH!!!

Boris Badenov's picture

Blame The Fed for getting the Index to the level it's at.

GunnerySgtHartman's picture

And as we all know, the bailouts in the previous crash laid the groundwork for this one.

When this one crashes, the Fed will NOT be able to put it back together - and that will be a GOOD thing.

NoDebt's picture

I'm just wondering.... not trying to be argumentative.... why WOULDN'T the Fed do exactly the same thing (but bigger) that they did the first time around?  I'm trying to gather why this seems so impossible to some.

Near as I can tell, we've just replaced the traditional boom/bust cycle with the Fed-driven boom/bust/bailout/print cycle.

 

 

TurtleSoup's picture

The trend seems to running against mall shopping. Unless another use can be found for these properties they cannot be revived.

Friedrich not Salma's picture

Malls will be where self-driving cars go to be repaired by AI robots.

Lovin-ZH's picture

O M G, you've got me rolling in the aisles, so perfect!

 

canisdirus's picture

Prime warehouse, garage, and repair facility opportunities for major new economy companies (like Amazon).

matter.form's picture

No shit, looks like micro-fulfillment centers with wide internal aisles to accommodate driver-less trucks to me. Or any of a million other things. Data centers? Commodity marketplaces (flour dealers in this room, fish mongerers in that room, people with wheelbarrows and pallet jacks through the thruways)?

People underestimate the value of our basic assets. Even if the building's foundations get fucked in the interim, the plumbing and electrical capacity built into that land is worth a shit-ton. Or even the earth leveling and watercourse redirection.

Natural selection uber alles baby.

Houses Depreciate's picture

Overpriced and zero demand. Worthless.

new game's picture

AGREED, as long as the dolla can retain its' federal reserve status...

MachoMan's picture

why WOULDN'T the Fed do exactly the same thing (but bigger) that they did the first time around?  I'm trying to gather why this seems so impossible to some.

The answer is in the last part of your question...  at some point, monetary stimulus loses its effectiveness, requiring more and more intervention to achieve the same level of change...  eventually hitting a wall.

Aside from the fact that the bailouts were 90%+ disapproved by the american public.  I can't fathom how another round would be received very well.  Although, I would guess 85%+ of the economy is now completely dependent upon continued monetary largesse, albeit much of which is through an incredibly inefficient/stagnant trickle down process/turnover.

If history is any guide, then I suspect your intuition is correct.  However, induction is a shitty decision-making tool...  it's just all we have sometimes.  If you know your "experiment" is going to fail, then why do you choose to conduct it?  Moreover, if everyone else knows your "experiment" is going to fail and doesn't want you to do it, then why would you choose to conduct it?  In other words, do you fold up shop and save the concept of the banking system or do you run this through to its logical conclusion, benefitting insiders, thereby destroying the sanctity (for argument's sake) of the banking system, as its true intentions are laid bare for all to see?