As our little Depression continues to grow into a greater Depression, the evidence is abundant and as clear as the pug nose on Barney Frank's fat face. When people lose their jobs or get cut back to part-time, they stop spending friviously at retailers. The marginal retailers start falling by the wayside. Strip malls start losing rent paying tenants. Mall owners can't make their interest payments to the bank. And wallah, you have a commercial real estate crisis.
Marginal companies are falling by the wayside and good companies are firing people with abandon. With less companies and less employees, less office space is needed. Wallah!!! 16.5% vacancy rates, headed above the 18.2% peak in 1991. Guess who can't make their debt payments. There is $3.4 trillion of debt outstanding on commercial real estate. This debt rolls every few years. Mall owners, office owners, and apartment owners are in a heap of trouble. The value of their property has plummeted, rental income has dried up, and they have no cash flow to support their current debt, let alone refinance it at higher rates.
At least $1.5 trillion of that debt will be written off by banks and other financial entities. So, keep believing in that recovery being touted by the Fed and the talking heads on CNBC.
U.S. Office Vacancies Reach Five-Year High of 16.5%, Reis Says
By Hui-yong Yu
Oct. 7 (Bloomberg) -- U.S. office vacancies rose to a five- year high in the third quarter, as job losses deepened and employers abandoned space in the recession, property research firm Reis Inc. said.
Vacancies climbed to 16.5 percent from 13.7 percent in the year since Lehman Brothers Holdings Inc. filed for bankruptcy, New York-based Reis said in a report. Effective rents, the amount actually paid by tenants, fell 8.5 percent, the biggest year-over-year drop since 1995.
“The decline in effective rents really accelerated after the fall of Lehman Brothers,” Victor Calanog, director of research at Reis, said in a statement. “Tenants will continue shedding occupied space as jobs are lost.”
U.S. job losses accelerated in September and the unemployment rate climbed to 9.8 percent, the highest level since 1983. Payrolls dropped by 263,000, bringing total jobs lost since the recession began to 7.2 million, the biggest decline since the Great Depression. The BBREIT Office Property Index of 14 stocks lost 14.31 percent in the 12 months through yesterday.
Financial firms cut more than 180,000 jobs in the Americas in the credit crisis that brought down or forced the sales of Bear Stearns Cos., Washington Mutual Inc., Merrill Lynch & Co. and Lehman Brothers.
The three months ended Sept. 30 marked the seventh straight quarter in which landlords reported a net loss in the amount of space occupied by tenants. About 19.6 million more square feet were vacant than in the previous quarter, Reis said.
Second-Worst Year
The U.S. is on pace for its second-worst year in terms of net office absorption since at least 1980, the beginning of Reis’s records, Calanog said.
The national vacancy rate was 15.9 percent in the second quarter.
New York vacancies jumped to 11.4 percent in the third quarter from 6.6 percent a year earlier, and the city’s effective rents tumbled 18.5 percent, Reis said.
The drop in rents is about twice the decline New York experienced in 2002, following the Sept. 11, 2001, terrorist attacks. Rents fell 9.3 percent that year, Calanog said.
The collapse of Seattle-based Washington Mutual helped drive that city’s office vacancy rate to 14 percent in the third quarter from 10 percent a year earlier. Effective rents fell almost 11 percent, Reis said.
WaMu collapsed in September of 2008 as federal regulators seized its banking unit and sold its assets to JPMorgan Chase & Co.
San Francisco, San Diego, Boston, San Jose and Southern California’s Orange County all reported declines in effective rents of at least 10 percent from a year earlier, Reis said.
“Weakness in rents is not concentrated in just a few” cities, Calanog said. “We have yet to observe clear, systematic evidence that the office market is bottoming out.”
To contact the reporter on this story: Hui-yong Yu in Seattle at hyu@bloomberg.net
![[REISofficeVacancyQ22009.jpg]](http://2.bp.blogspot.com/_pMscxxELHEg/SlLLr24eyXI/AAAAAAAAFw4/IbtelwYN3jo/s1600/REISofficeVacancyQ22009.jpg)
Tuesday, October 06, 2009
Fed Worries about CRE Grow
by CalculatedRisk on 10/06/2009 10:07:00 PM
From the WSJ: Fed Frets About Commercial Real Estate
Banks in the U.S. "are slow" to take losses on their commercial real-estate loans being battered by slumping property values and rental payments, according to a Federal Reserve presentation to banking regulators last month..... "Banks will be slow to recognize the severity of the loss -- just as they were in residential," according to the Fed presentation, which was reviewed by The Wall Street Journal.
A Fed official confirmed the authenticity of the document, prepared by an Atlanta Fed real-estate expert who is part of the central bank's Rapid Response program to spread information about emerging problem areas to federal and state banking examiners throughout the U.S.
While the Sept. 29 presentation by K.C. Conway doesn't represent the central bank's formal opinion, worries about the banking industry's commercial real-estate exposure have been building inside the Fed for months. ...
Mr. Conway's presentation painted a bleak picture of the sliding real-estate values and enormous debt that will need to be refinanced in the next few years. Vacancy rates in the apartment, retail and warehouse sectors already have exceeded those seen during the real-estate collapse of the early 1990s, Mr. Conway noted. His report also predicted that commercial real-estate losses would reach roughly 45% next year. Valuing real estate has always been tricky for banks, and the problem is particularly acute now because sales activity is practically nonexistent.
...
More than half of the $3.4 trillion in outstanding commercial real-estate debt is held by banks.There is much more in the article, including a discussion on interest reserves masking bad loans (something we've been discussing for a few years) and "extend and pretend". Hey, hoocoodanode!
Note: REIS reported today that the apartment vacancy rate in cities hit a 23 year high: From Reuters: US apartment vacancy rate hits 23-year high-report and other CRE categories are also seeing rapidly rising vacancies and falling rents.
59 Comments
JakeTowne
Nicht gut. Combined with the gold price, it is obvious to me that time is running out to prepare.
imaprick
the sky is falling. you dopes. that market has already collapssed. thanks for the heads up. you guys heard who won super bowl 43? come on. you yearn for black swans. you will all be disapointed when nothing happens. all you wimps sit here and type bs. why don't you put your money on the line if you are so sure. and i am not talking about 100 shares of gld you pansy. guaranteed none of you have any significant positions. wankers.
Flyguy
yo, prick, go find another sandbox to piss in, idiot.
imprick
fine. i won't post anymore. didn't you enjoy having someone with an opposing view? seemed thats all this website is. a bunch of people with the same doomsday view. i hope you are right for your wallet's sake. good luck.
TLaCour
"The three months ended Sept. 30 marked the seventh straight quarter in which landlords reported a net loss in the amount of space occupied by tenants."
Besides that, rental RATES are down, so the very income that underlies the value of REITs is getting double-whammied.
And yet, for the three months ending Sep 30, the IYR is up 46%. Irrational, manipulated, whatever.
Life as a polar bear is hard, and it ain't due to global warming.
imaprick
I could break you, mate, in two pieces over my knees. You know it, I know it. I could buy you six times over.
johngalt
Prick you may not be lying about how much money you have but remember, money comes and money goes but you will always be stupid!
JimQ
Ouch. Hotels too.
From the LA Times: Hotel defaults, foreclosures rise in California (ht Ann)
... Statewide, more than 300 hotels were in foreclosure or default on their loans as of Sept. 30 -- a nearly fivefold increase since the start of the year, according to an industry report released Tuesday....
Most struggling hotels remain open, but industry experts believe many properties are likely to be closed down in the months ahead, even if they are not in foreclosure, because they are losing so much money. ...
"I have never seen so many lenders contemplating mothballing properties," said Jim Butler, a hotel lawyer and chairman of the global hospitality group for Jeffer, Mangels, Butler & Marmaro. "It can and it will get worse for the hotel industry."
...
Statewide, 260 hotels were in default on their loans and 47 had been taken over by their lenders in foreclosure, the Atlas report said.
... a leading hotel consulting firm, Smith Travel Research, recently issued a report that predicted no significant improvement for the hotel industry until 2011 at the earliest.
"It's going to be a lot worse than it is now," said Bobby Bowers, senior vice president of Smith Travel Research.
... an increasing number of hotels have so little revenue that they can't even afford to pay their operating bills and payroll, not to mention servicing debt.
Owners of such hotels are increasingly handing the keys back to the lenders, and the problem is likely to get worse: As many as 1 in 5 U.S. hotel loans may default through 2010, UC Berkeley economist Kenneth Rosen said.
In some cases the lenders are simply locking up the properties...
Daniel
drfrye
OK! This has been one of the most inflammatory discussions yet. I see the evidence as put forth by JQ, but Imprick (aptly named if you ask me) is spouting without telling us anything other than "he could break us, he could make us". So you speculate in RE and other items. that is good, but on the other side of the coin, if you are in a position to continue to make money then that is what you are able to do.
I on the other hand am down over 30% this year in my practice. This is due to the fact that the insurance doesn't reimburse at a reasonable rate, clients are moving from the area at 15% / month and my overhead is leveraged beyond belief, because I did not foresee that MY business would drop by 60% in the last 2 years.
So, to you Imprick, if you can't be constructive other than just ascerbic, please do not post. I don't mind people arguing and saying that someone is very wrong in their thinking, but nebulous statements and those pull from the darkness do nobody any good.
I am currently getting ready to tell the lender I am done with my building. I am underwater by at least $400K and the market is saturated with for lease and for sale signs, and this is in N. CA.
Rental rates are down around $1.50 for Class A buildings and dropping. Tax revenues are gone, and in Richmond, CA they have to cut another $15M from the 2009-10 budget to make things work (I don't think it is enough). California got hit the hardest because the RE market was crazy in their appraisals and we all got caught up in it, and don't lie about that.
The next shoe to drop is commercial notes and it will come faster than a tsunami in Samoa.
You can call anyone you want "stupid" but most people were doing okay until the market took an unforseen (to the general population) turn due to the greed of the banks.
so, Imprick, give some constructive critizism (i.e, some things that may or may not work, or at least explain WHY you think that JQ and everyone else is full of it), but please leave your vitriole at home in the toilet (or just flush it) where it belongs. thank you!
JimQ
Picture of Imaprick
KayGee
Not wallah; voilà:
Definition: Used to call attention to or express satisfaction with a thing shown.
Example: Mix a little fiscal indiscipline with buckets of monetary madness and voilà a greater depression .
optionsgirl
I think that was Cetin!
Anonymous
Most of Imaprick's lines in this discussion are direct quotes from the characters in the movie Wall Street.
lou27
I keep waiting for this crash that's never gonna happen, time to face reality, there's not gonna be no correction, would have happened by now, we're 8 months into this supposed rally, it's for real now.
JimQ
Housing to the rescue, NOT!!!
October Price Reductions – Top 50 U.S. CitiesRank
City
State
Percent of Listings with Price Reductions
Average Reduction (%)
Total Amount of Reductions
1
Memphis
TN
36%
9%
$ 27,048,295
2
Minneapolis
MN
36%
9%
$ 26,925,756
3
Portland
OR
36%
9%
$ 58,329,873
4
Indianapolis
IN
36%
8%
$ 35,428,503
5
Baltimore
MD
36%
11%
$ 44,480,261
6
Milwaukee
WI
35%
9%
$ 19,047,006
7
Jacksonville
FL
35%
11%
$ 104,019,823
8
Tucson
AZ
34%
11%
$ 71,285,454
9
Raleigh
NC
33%
7%
$ 44,580,508
10
Boston
MA
33%
8%
$ 45,619,224
11
Columbus
OH
33%
8%
$ 17,343,846
12
Seattle
WA
31%
8%
$ 64,987,200
13
Charlotte
NC
31%
9%
$ 106,244,826
14
Kansas City
MO
31%
8%
$ 24,698,412
15
Albuquerque
NM
30%
8%
$ 26,936,075
16
Chicago
IL
30%
9%
$ 210,705,118
17
Atlanta
GA
29%
11%
$ 190,220,820
18
Colorado Springs
CO
29%
7%
$ 29,348,550
19
Austin
TX
29%
9%
$ 104,327,580
20
Dallas
TX
28%
7%
$ 78,988,388
21
Tulsa
OK
28%
6%
$ 12,859,875
22
Honolulu
HI
28%
10%
$ 42,826,490
23
Nashville
TN
28%
7%
$ 29,959,106
24
Philadelphia
PA
27%
9%
$ 57,167,124
25
San Francisco
CA
27%
10%
$ 68,841,603
26
Omaha
NE
27%
6%
$ 14,511,252
27
Washington
DC
27%
10%
$ 68,321,587
28
Phoenix
AZ
27%
13%
$ 102,105,905
29
Los Angeles
CA
27%
12%
$ 281,941,920
30
New York
NY
27%
13%
$ 716,758,762
31
Sacramento
CA
26%
11%
$ 18,768,120
32
Cleveland
OH
26%
12%
$ 11,193,888
33
Mesa
AZ
26%
14%
$ 26,088,525
34
Virginia Beach
VA
26%
8%
$ 34,708,902
35
Louisville
KY
26%
7%
$ 12,962,532
36
Oklahoma City
OK
26%
7%
$ 10,479,932
37
Miami
FL
26%
15%
$ 215,268,441
38
Long Beach
CA
25%
10%
$ 26,021,307
39
Arlington
TX
22%
6%
$ 4,849,236
40
San Jose
CA
22%
8%
$ 24,416,386
41
Oakland
CA
22%
10%
$ 9,707,016
42
El Paso
TX
22%
8%
$ 18,460,260
43
Denver
CO
22%
9%
$ 50,467,081
44
Fort Worth
TX
21%
8%
$ 21,801,702
45
San Diego
CA
20%
9%
$ 48,435,840
46
Las Vegas
NV
19%
16%
$ 154,008,756
47
Detroit
MI
18%
25%
$ 11,956,168
48
Houston
TX
17%
6%
$ 69,046,794
49
San Antonio
TX
14%
7%
$ 35,460,120
50
Fresno
CA
14%
12%
$ 5,706,960
JimQ
by CalculatedRisk on 10/08/2009 09:05:00 AM
Reis reports the strip mall vacancy rate hit 10.3% in Q3 2009; the highest vacancy rate since 1992. And rents are cliff diving ...
From Reuters: Shopping center vacancy rate hits 17-year high: report
lou27
Sorry Jim, you make alot of valid arguements, but I'm moving to the other side, I've read every bear arguement there is, even search the internet looking for them, to the point it's negatively affecting my life. This has gone on for 8 months, I've read the comparisons to the GD, the future riots etc., don't believe any of it now, out of every 10 trading days, 8-9 are green, keep reporting because the other side has to be told but let's face it, the bull market is here.
drfrye
I always question why and how it is not coming to fruition that the bear fall is not complete. Bad news after bad news. mathematics is not an opinion, and yet the rally continues. too much like gambling to me, so no, I am not in the market at this point.
I didn't gain, but I didn't lose either. One question I have, all those people that are on fixed income/retirement in CD's, MMF, etc, they are only making .5-1%, and yet they are falling by the wayside. Are we looking a the proverbial frog in hot water scenario, that we will all be cooked before we realize that the water is boiling?
I don't like this market. Everyting should be falling apart and yet it is not. How long? Just long enough to sucker you in, so that the ones that want to get out can, flush and you are left holding the pyramid bag with nothing but leprican gold in it (for those of you who don't know, leprican gold is only good for a few hours, then it disappears or changes into slugs).
Well, I've had my say. Watch and wait, that is all I can do and try and survive this down business cycle. BTW - I am laying off 2 more employees, that is how slow it is.
Tore
Why not gold, silver metals and precios metals mining stocks?
So far I am up 50%
JennJohnson
I think a lot of the reason the stock market is holding its own still, arguably even in bubble territory, is that the Fed has put a floor in the real estate market thru all of its purchasing programs. It has even started the securitization process again. The IMF has also come in wanting to buy up the CMBS, whole loan type paper. With that as a backstop, it is making it not look so grim even though in reality it still is. The risk has just been transfered to the govt, who can print money, instead of a lot of the banks.
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