Best of the Week
Most Popular
1.The Trump Reset, US Empire's Coming Economic, Cyber and Military War With China (2/2) - Nadeem_Walayat
2.Now Is the Time to Buy Gold - 5th Jan 17 - John Grandits
3.CIA Planning Rogue President Donald Trump Assassination? Elites "Manchurian Candidate" Plan B - Nadeem_Walayat
4.The Trump Reset - Regime Change, Russia the Over Hyped Fake News SuperPower (Part1) - Nadeem_Walayat
5.Most Popular Financial Markets Analysis of 2016 - Stock Market Crash Postponed Again - Nadeem_Walayat
6.No UK House Prices Brexit Crash 2016 Despite London Weakness, Forecast 2017 - Nadeem_Walayat
7.President Trump Understands the NSA, CIA... LIE, America's Intelligence Agencies Crime Syndicate! -Nadeem_Walayat
8.President Donald Trump's 2017 New Year Message, BBC Fake News, Was 2016 a Dream? - Nadeem_Walayat
9.Major Stocks Bear Market Still Looms - Zeal_LLC
10.Biased 2017 Forecasts - Debt, Housing and Stock Market (1/2) - James_Quinn
Last 7 days
Returning Gold Bulls - 18th Jan 17
Biotech Breakthrough Could Create A $11.4 Trillion Opportunity - 18th Jan 17
Bitcoin and Gold - Outlook, Volatility and Safe Haven Diversification - 17th Jan 17
Stock Market Uptrend on Borrowed Time - 17th Jan 17
The One Stock to Retire On - 17th Jan 17
Trump anti-Communist Counter Revolution - 17th Jan 17
US Stock Market Update as the Trump Inauguration Approaches - 17th Jan 17
The American Crisis - Common Sense 2017 - 17th Jan 17
Obama Leaves, Hope Arrives, Will Stupid Stay? - 17th Jan 17
Damage Inflicted by Precious Metals Manipulation Is in the “Multi Billions” - Keith Neumeyer - 17th Jan 17
Gold Price Forecast 2017 Update - Video - 17th Jan 17
The Story of the U.S. Regime Change Plan in the Philippines - 16th Jan 17
Gold Price 2017 Trending Towards $1375 as Forecast - 16th Jan 17
'Deep State' CIA Director States We are Not NAZI's, Warns Trump Does Not Understand Russian Threat - 15th Jan 17
UK House Prices Forecast 2017 - Crash or Bull Market? - Video - 15th Jan 17
SPX Stocks Bull Market Update - 14th Jan 17
President Trump vs the Deep State that Hides in Plain Sight - 14th Jan 17
The Impact of Sir Alex Ferguson's Retirement on Man United's Share Price - 14th Jan 17
What Can Stock Market Tell You About Politics? - 13th Jan 17
Big Gold Buying Coming 2017 - 13th Jan 17
A Bullish Case for Gold 2017 - 13th Jan 17
Will Stocks Bull Market Continue to Charge or is it Time to Sell the News - 13th Jan 17
Gold and Silver Off To Shining Start to 2017 - 13th Jan 17
Gold’s Fundamental Outlook for 2017 - 13th Jan 17
Is trading stocks and shares just as luck-based as roulette? - 13th Jan 17
Trump CIA Like Nazi Germany - Fake MI6 Intelligence leaked to Fake News Mainstream Media - 13th Jan 17
USD in Decline. SPX and TNX May Follow - 12th Jan 17
CIA War On Trump - Leaks Fake MI6 Intelligence to Fake News Broadcast Media - 12th Jan 17
Registered Address.co.uk London Business Registered Office Address Mail Forwarding Review - 11th Jan 17
13 Contrarian Economic Predictions For 2017 - 11th Jan 17
10 Potential Black Swans and Opportunities for the US Economy in 2017 - 11th Jan 17
How to Get a Bird of Paradise Plant to Flower - UK Growing Video - 11th Jan 17
The No.1 Energy Stock To Buy Right Now - 10th Jan 17

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

What Can Stock Market Tell You About Politics?

U.S. Consumer Debt Deleveraging Equals Commercial Real Estate Market Collapse

Housing-Market / US Housing Oct 07, 2010 - 05:35 AM GMT

By: James_Quinn

Housing-Market

Diamond Rated - Best Financial Markets Analysis ArticleThere is a Part 2 to the story of Consumer Deleveraging that will play out over the next decade. Consumers will deleverage because they must. They have no choice. Boomers have come to the shocking realization that you can't get wealthy or retire by borrowing and spending. As consumers buy $500 billion less stuff per year, retailers across the land will suffer. To give some perspective on our consumer society, here are a few facts:


  • There are 105,000 shopping centers in the U.S. In comparison, all of Europe has only 5,700 shopping centers.
  • There are 1.2 million retail establishments in the U.S. per the Census Bureau.
  • There is 14.2 BILLION square feet of retail space in the U.S. This is 46 square feet per person in the U.S., compared to 2 square feet per capita in India, 1.5 square feet per capita in Mexico, 23 square feet per capita in the United Kingdom, 13 square feet per capita in Canada, and 6.5 square feet per capita in Australia.

Despite the ongoing recession and the fact that consumers must reduce their spending over the next decade, irrationally exuberant retail CEOs continue their death march of store openings. Below are announced expansion plans for some major retailers:

  • GameStop - 400 new stores
  • Walgreens - 350 new stores
  • Dollar General - 315 new stores
  • Ashley Furniture - 300 new stores
  • Target - 128 new stores
  • Starbucks - 100 new stores
  • Best Buy - 55 new stores
  • Kohl's - 50 new stores
  • Lowes - 45 new stores

Retailers expanding into an oversaturated retail market in the midst of a Depression, when anyone without rose colored glasses can see that Americans must dramatically cut back, are committing a fatal mistake. The hubris of these CEOs will lead to the destruction of their companies and the loss of millions of jobs. They will receive their fat bonuses and stock options right up until the day they are shown the door.

All of the happy talk from the Wall Street Journal, CNBC and the other mainstream media about commercial real estate bottoming out is a load of bull. It seems these highly paid "financial journalists" are incapable of doing anything but parroting each other and looking in the rearview mirror. Sound analysis requires you to look at the facts, make reasonable assumptions about the future and report the likely outcome. Based on this criteria, there is absolutely no chance that commercial real estate has bottomed. There are years of pain, write-offs and bankruptcies to go.

Let's look at some facts about the commercial real estate market and then assess the future:

  • The value of all commercial real estate in the U.S. was approximately $6 trillion in 2007 (book value, not market value).
  • There is approximately $3.5 trillion of debt financing these commercial properties.
  • Approximately $1.4 trillion of this debt comes due between now and 2014.
  • The delinquency rate for all commercial backed securities exceeded 9% for the 1st time in history last month and has more than doubled in the last 12 months.
  • Non-performing loans are close to 16%, up from below 1% in 2007.

Do these facts lead you to believe that the commercial real estate sector has bottomed, as stated in the Wall Street Journal? The Federal Reserve realized the danger of a commercial real estate collapse to the banking system over a year ago. They have encouraged banks to extend and pretend. The website www.MyBudget360.com describes in detail what has occurred:

What has happened is the Fed has allowed this shadow monetization of the debt and banks let borrowers roll over CRE debt without even making payments in many cases!  Think of an empty shopping mall.  There is no buyer for this in the current market.  So why would a bank want to foreclose on the borrower?  Instead, they pretend the asset is worth $10 million while the borrower makes no payment and the Fed keeps funneling money into the banking system.  In the end, the value of the dollar gets crushed and you end up bailing out the banking system. Commercial real estate has collapsed even harder than residential real estate.  This market is enormous in terms of actual debt.  There is no official bailout on the books but it is occurring through a slow and deliberate process.  Banks know that they are essentially insolvent and they are dumping this junk onto the taxpayer.

 This grim story began between 2004 and 2007. The horrifying ending will be written between 2011 and 2014. Commercial real estate loans for office buildings, malls, apartment buildings and hotels usually have 5 to 7 year terms. If you thought the debt induced bubble in real estate only affected residential real estate, you are badly mistaken. Before the boom, a normal year would see $100 billion in commercial real estate transactions. Between 2004 and 2007 there were $1.4 trillion of deals done, with 2007 reaching a peak of $522 billion of commercial real estate deals. Shockingly, the Wall Street banks, run by MBA geniuses, loaned developers a half trillion dollars at the very peak in the market. Sounds familiar. Thank God the taxpayer has bailed these Einsteins out so they could live to make more bad loans and collect big fat bonuses.

Commercial real estate prices rose 90% between 2001 and 2007, driven by the loose monetary policies of the Fed and complete lack of risk management on the part of the banks making the loans. Knuckle dragging mouth breather developers built malls, apartments, offices and hotels with abandon as billions of dollars rained down on them from Wall Street. The consumer delusion of debt financed wealth led to the developer delusion that 100% occupancy and increasing rents for all eternity were guaranteed.

Commercial real estate prices have dropped 42% in just over a year. This means that the $6 trillion value of all the commercial real estate in the country has dropped to $3.5 trillion. The debt remained in place. The billions in debt issued in 2003 - 2005 is coming due between 2010 and 2012. The underlying assets are worth billions less than the debt that must be refinanced. Commercial loan payments by owners can only be made from cash flow generated by rental income. A key requirement in generating rental income is tenants.

Let's examine the current state of vacancy rates for offices, shopping malls and rental properties. The current office vacancy rate of 17.5% is the highest since 1993 and is just below the all-time high 18.7% in 1992. The WSJ has concluded, with no data or analysis, that the vacancy rate has bottomed. As the employment data proves, companies are not hiring employees. New companies are not being formed. Government mandates and regulations regarding healthcare and uncertainty about taxes will keep the formation of new small companies at a minimum. Conglomerates continue to ship jobs overseas. Part 2 of this Depression will drive more companies out of business. Office vacancies will remain at record levels for the next five years. 

Mall vacancies between 9% and 11% are at record levels. There is absolutely no chance that these vacancy rates decline over the next few years. With consumers deleveraging, wages stagnant, unemployment high, and retail oversaturation, there are thousands of retail stores destined to close up shop. Ghost malls are in our future. They will come in handy as homeless shelters and soup kitchens. Mall developers will be defaulting in record numbers.

Apartment vacancy rates peaked at 11% in 2009, the highest level in history. With millions of vacant homes and millions of available rental units, rental rates will stay low for years. The cash flow of apartment developers will under stress and will lead to more loan defaults.

Based upon the current rising delinquency rates of 15.7% for commercial real estate loans and 9.05% for CMBS, there is no bottom in sight. Only raging mindless optimists like Larry Kudlow could ignore the facts and conclude that all is well in commercial real estate world. Banks pretending that the loans on their books aren't worth 40% to 50% less, while also pretending that borrowers with negative cash flow can make loan payments, is not a solution. It is a Federal Reserve encouraged fraud. Allowing loans to be rolled over with no hope of ever being repaid will only prolong the pain and delay the inevitable. 

The facts are that hundreds of billions in commercial loans are coming due, with a peak not being reached until 2013. If banks were to properly account for the true value of these loans, hundreds of regional banks would be forced to fail. This is unacceptable to government authorities. They will insist that the fantasy continue. Banks and real estate developers will pretend to be solvent, hoping the economy will miraculously repair itself and eventually make them whole. I understand these bank CEOs and delusional developers also believe in Santa Claus, the Easter Bunny, and the Efficient Market theory. It seems our entire financial system is based upon debt, fantasy, fraud, and delusion.

Join me at www.TheBurningPlatform.com to discuss truth and the future of our country.

By James Quinn

quinnadvisors@comcast.net

James Quinn is a senior director of strategic planning for a major university. James has held financial positions with a retailer, homebuilder and university in his 22-year career. Those positions included treasurer, controller, and head of strategic planning. He is married with three boys and is writing these articles because he cares about their future. He earned a BS in accounting from Drexel University and an MBA from Villanova University. He is a certified public accountant and a certified cash manager.

These articles reflect the personal views of James Quinn. They do not necessarily represent the views of his employer, and are not sponsored or endorsed by his employer.

© 2010 Copyright James Quinn - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

James Quinn Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife