Commercial real estate blues

My pal Fudrucker does some commercial real estate as well as residential, and is just back from a meeting with some heavy hitters in that field – boy are they bummed. Word is, the bottom may be as far out as 2014. Rents are down, down down, and commercial real estate is all about money flow. And unlike residential real estate, there’s no such thing as a short sale – it’s bankruptcy or no deal.

I know from nothing about commercial real estate, but I don’t find this vision unpersuasive. Things do not look good, from this bear’s perspective.

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16 responses to “Commercial real estate blues

  1. Cos Cobber

    the internet is not helping. how many of us have ditched the standard office for the at home office. quite a few….

  2. Cos Cobber

    btw, so um…does fudrucker still believe that big government and higher taxes will usher in a new prosperous age for CT? meeting with commercial realtors should be a nice splash of cold water..no?

    i’ll feel like my little gwich based company, with satelite offices nationwide could be pushed to florida (i hope not) at the sight of the next tax increase….

  3. Stanwich

    Cobber, real people work in real offices.

    Not sure what half-baked boiler shop presentation Fuddie-cakes went to today but commercial real estate is doing a lot better than you’d think. Foreclosures on large assets have been successful and have drawn plenty of interest. The workout process is happening all the time, it’s just that people keep citing the delinquency rate and impending loan maturities as the only signals of the market’s direction. The fact of the matter is that commercial real estate issues will clean up much faster than residential because politicians have no political stake in the game, unlike when they rant like idiots against “predatory” home lenders. If you looks at recent sales in major markets you will see very high interest. Just like in residential, lesser locations will never see the interest they had in the boom years and that will lead to a lot of pain for certain owners.

  4. Cos Cobber

    Stan, my sentiments are based on the continued weakness in Fairfield County, that is all. Yes, real people work in real offices, but if just 5% can work from home, that hurts the office market. I know several people with cramped desks in the city who split time from home. That city desk keeps getting smaller and their time their a bit less.

    Btw, I understand call center jobs (obviously non an issue around here) are increasingly shifted to home as well.

    Do you think Stamford is poised for a rebound?

  5. Anonymous

    A trillion plus dollars of debt coming due on commercial R/E in the next two years and a lot of this inventory has been adjusted at least 25% (downward) and renters paying 30% less in rent so..(Talk about underwater)…My questions is..will the banks be able to “process this” like they have been able to work with the residentail inventory for the past 3 years……should be interesting……the bottomline is..if jobs don’t pick up and or come back I would think the commercial market is really screwed.

  6. ff

    Stanwich–

    Start with the word “foreclosure” and you may see that we are speaking the same language. The fact that foreclosures are stimulating sales velocity only highlights the fact that income (and consequently prices) are way, way down in the commercial sector. The fact is that commercial real estate is driven exclusively by profit, and these days it is not defined as anything other than income/expenses. Income is down, expenses are up, and debt is virtually non-existent. Care to find profit in there? If you cannot find profit, we are not at the bottom.

    Agreeing for once with Chris, you can’t survive a market if people or businesses are not allowed to fail. Artificial means of stopping foreclosure just skew the market and make recovery stillborn. Apart from compassionate circumstances, only classic market forces can get us out of this real estate mess. Commercial RE is just usually more clear-eyed about this.

    As far as taxes, I’m sure you all know that the irresponsible Bush tax cuts inflated a bubble that burst all over the place, and all that fake money that was supposedly injected into the economy is gone forever, and only the $5.8 trillion that Bush threw on our deficit is left to repay. So sure, lets cut taxes again. I vote for the elimination of the Marine Corps, half the House of Representatives, and the sale of Yellowstone instead. That should get us through a couple of months.

  7. My very non-scientific walkabout survey of Greenwich Avenue indicates a lot of froth and spume, i.e., flashy but here-today, gone-tomorrow stores. The exceptions are the restaurants: you can’t get a seat in Meli-Melo, Terra is being staked out by Susie the dish, and Judge Judy is often to be found at Katzenberg’s. The chain stores are leaving with their tails between their legs. Maybe we’ll never again see the Mom & Pop stores we all remember, but with Versailles moving up the Avenue and expanding, and My Favorite Place coming in next to it, perhaps we’ll see Greenwich Avenue as Restaurant Row–and all of them, mercifully, locally-owned.

    Enough with the out-of-towners who have been coming here in recent decades to try to bilk us with their shoddy chain-store wares! Avaunt! as Shakespeare would have said. And let’s support our fellow-citizens who are slowly but surely turning Greenwich Avenue into the culinary capital of the country–if not the world.

  8. Walt

    Scribe Man –
    Greenwich Avenue will not be the culinary capital of the world until it gets a White Castle. And I don’t see that on the horizon. I know, it is sad.
    And what happened to the movie theater? And the ice cream store?
    Your Pal,
    Walt

    • Walt – a client/friend of mine owns and runs BowTie Cinema and has some interesting plans for the Railroad Avenue theatre. Stay tuned, but his heart is in the right place, and I expect good things. I didn’t know White Castle was still in business.

  9. Anonymous

    Outside of the debt bubble burst, commercial RE faces secular changes of increasingly virtualized work/business and smaller needs for costly office space for worker bees

    World outside Silicon Valley tends to be about 3-5 yrs behind, but more and more workers (esp salesguys, support, paralegals, junior workers, etc) are working from home on their iPads/laptops and come in to office once a week for group meetings, using shared cubes, entailing dramatic reduction of needs for costly office space in either CBDs or suburban office parks….and reduced traffic hassles and opportunity costs for both employers and employees

    Silicon Valley has more $100Bn+ mkt cap cos. than any region of world (incl NYC) yet has some of fastest traffic flows and plenty of empty offices w/increasingly valuable cos. (think Apple, Google, Cisco, etc), yet shrinking headcount, virtualized telecommuting labor, offshoring, outsourcing: the place that invented the tech to transform how every co. works to maximize productivity and profitability

  10. Cos Cobber

    FF, you circled back to Bush (classic) and dodged the big question about CT taxes. I want to know, how do you propose we plug CT’s budget holes? I say, at the state level, keep the taxes are they are and learn to live with less.

    You are a man deeply interested in local and state politics, so your answer as to how to fix the state budget and yet, keep as an CT attractive place to conduct business greatly interests me. So can you answer me this time?

    Now, as for the Bush cuts, as I have always said, the Bush cuts where a mistake. We are headed back to the Clinton era tax rates and that is fine with me. That said, whatever is done at the federal level has no bearing on how CT’s positions itself relative to NY, RI, MA and the nation going forward.

  11. Mr. 85 Broad St.

    Real estate is all about leverage. This Bloomberg story today says it all….

    Commercial Mortgages Fail to Pay as Lending Increases (Update1)

    By Sarah Mulholland
    June 28 (Bloomberg) — More than half of commercial mortgages bundled and sold as bonds have been unable to pay off maturing debt this year even as the availability of financing increases, according to Bank of America Corp.
    Between 50 percent and 60 percent of loans on skyscrapers, hotels, shopping malls and apartment complexes failed to refinance within a few months of their maturity date this year, Bank of America Merrill Lynch analysts said in a report.

  12. Cos Cobber

    I’m going to give FF a couple days to stew. I really hope he provides a response on the CT budget.

  13. ff

    Connecticut has a systemic political deficiency that causes most – if not all – of our economic problems. Each of the 169 towns and cities have to copy eachother, in school boards, police, social services, political power and the like. We need to share to save. We waste money like mad over “turf”. This bubbles up on the legislative side when we elect representatives who in many respects think only of their districts rather than the State as a whole. So, while parochial interests result in the Assembly becoming a place where narrow agendas become law and big ideas are stuffed, things just become more intractable and the wasteful bureaucracies (Department of Transportation, are you listening) keep burning through our cash, unchecked.

    My answers: more regional cooperation on services and deliveries (no new counties with new bureaucrats), reduce the size of the Assembly to enhance regional accountability, provide more authority for the Governor to streamline the waste at the agencies – which doesn’t exist now, and make tax increases targeted to true income growth, or job growth sectors rather than general revenue increases. Also, consolidate the 7 State employee and Charter Oak health plans into one. The health dollars are killing us.

    But you have to get someone in there that is willing to make these hard decisions and bring along enough who know that it is right – even if it may end their political careers.