Boom and Bust
Commercial Real Estate Outlook Darkens
By Jonathan Weber , 11-15-09
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Even as the residential real estate market begins to stabilize, albeit at prices far below peal levels and with crucial help from a homebuyers tax credit, economists and bankers are bracing for the fall-out from a dramatic bust in the commercial real estate sector. In the Mountain West, the pain is being felt in the resort market and in some over-built urban areas, such as Idaho’s Treasure Valley, though Denver and many of the fast-growing small cities in the region may avoid the worst.
Like the residential real estate bubble, the commercial real estate boom of 2003-2007 was fed by cheap money and lax lending standards. Institutional investors such as hedge funds and insurance companies - strangely blind to the possibility that real estate values could decline - had an insatiable appetite for any loan that had a decent interest rate and was backed by real estate. When the rosy projections on cash-flow for apartment complexes, office buildings, shopping malls and resort hotels were revealed to be pipe-dreams when the market turned, the carnage began - and it’s likely to continue for a while, according to a recent report from the Urban Land Institute and PricewaterhouseCoopers.
As NewWest.Net readers know all-too-well, some of the most reckless commercial real estate lending anywhere happened in the mountain resort market. A cover story in Business Week magazine this week cites Credit Suisse’s $375 million loan to the Yellowstone Club “one of the starkest examples of poor underwriting in recent memory,” though the truth is that the Yellowstone Club loan will eventually yield at least some payback to lenders, while similar loans in the hundreds of millions of dollars at Promontory Club, Tamarack Resort, Lake Las Vegas and other properties are almost certainly a total loss.
While the Yellowstone Club and Promontory are now out of bankruptcy and in full operation, the fall-out in the resort sector is far from over. At Tamarack, a group of homeowners says it has lined up financing that would enable the resort to open for the winter, but Credit Suisse opposes the plan, and the most likely scenario is that the ski hill will remain closed and a foreclosure trial in February will put the property in the hands of the Credit Suisse lender group. Moonlight Basin, near Big Sky, is also facing foreclosure, though the lender - the bankrupt Lehman Bros. - appears determined to keep it operating, at least for now.
The problems are not limited to big luxury resorts. Also in Big Sky, a modest hotel called The Lodge at Big Sky is in bankruptcy. South of Missoula, Tom Maclay’s dream of building a new destination resort on his family’s ranch and adjoining Forest Service land is in tatters as MetLife, which lent Maclay $18 million, moves to foreclose on the property.
Outside the resort sector, the problems are perhaps less colorful but no less serious. A story in the Idaho Statesman Sunday reported that commercial rents in the Treasure Valley are down as much as 30%, and the vacancy rate in once-hot Eagle is now 27%. The pressure is building on many community banks that lent to developers of office buildings and shopping malls.
As with the residential market, some of the worst commercial real estate problems are in Las Vegas and Arizona; nationwide, some $1.4 trillion in commercial real estate debt will soon come due, according to BusinessWeek, and the problems extend to almost every type of property.
There are a few silver linings. Downtown Boise has fared much better than the surrounding area, according to the Statesman, lending credence to the notion that vibrant center cities will hold up better than suburbs and exurbs. The Urban Land Institute praises Denver for its green initiatives, and says the city’s emergence as a hub for alternative energy will help put a floor under the commercial property market.
For many small businesses, moreover, the slump provides an opportunity to negotiate a better deal on rent. If you sign a long-term lease, though, make sure the price is very good indeed, because the commercial property market may not yet have found the bottom.
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Comments
Can you say "Quadrillion" and then some?
Reality bites, and the biggest problem we have is that people demand to continue to live in a linear world that never existed to begin with, and they assume that we shall return to the illusion we lived in before that horizon-darkening cloud of chickens came home to roost. Simply because you have a certain view of reality does not argue that such is real at all. Debt matters, even if what one (or the "collective") borrowed was created by magicians.
All we have known our entire lives was a lie - a monetary system based upon money made out of thin air and easy credit available to borrow what wasn't really there in the first place. As the most egregious of examples, see the "derivatives" bomb ticking away mentioned above. This whole thing is about to do the big "Humpty Dumpty", and discussions about "Trolley Systems" and neat little bike paths coursing through the middle of nowhere and other such wishes aren't even going to register on the radar screen. Think Tom Joad or worse. Maybe far worse.
Google up July '08's Orion Magazine and read "The Gospel of Consumption and the Future We Left Behind" for a look in the mirror, even if your visage doesn't go full-screen as so many others do. Read everything James Kunstler has ever written, and just start getting ready to find out first-hand what he means by things going "tribal" in his latest installment of "Clusterfuck Nation". Unlike what that fatuous liar Bill Clinton said, "Diversity" isn't going to be one of our strengths, as the North American version of Yugoslavia is about to become a small screen wonder on the nightly news until the grid goes down. It's a train crash happening in slow-motion, the cars all telescoping in on each other, the air filling slowly with wailing and the gnashing of teeth.
"god Bless us, everyone."
"It can't happen here", we choose to think. We want to think. Even the atheists and agnostics pray for such to not occur. Google up Dimitri Orlov for some insight on when "Too big to fail" crashes to the ground. Make certain you read his thoughts on which peoples - the Russians or the "Americans" (whatever that really means) were/are better prepared to deal with societal collapse and what that entailed(s). We "can't handle the truth" says Jack. Hell, we don't even want to hear it.
It's a non-linear world, and we're but short moments away from getting one of the worlds biggest history lessons right in the damn teeth. Too much hubris and never enough common sense. "I want my M.T.V.", and to paraphrase Firefall, it's now time to "Pay the Pipers call, we're headed for a fall."
Have a profitable day. (And don't forget to pay your taxes...)
Commercial real estate is financed on much shorter terms than residential. The financial war chests for economic down turn are being exhausted daily, and we still have a serious bump in the road to recovery to over come. Add to that the joblessness of the recovery as money stabilizes and the vast investments of public employee retirements and unused collected taxes go to financial institutions far from the city or state that generated those monies, money which is not producing jobs. An economic death spiral might take form due to joblessness and the lack of income taxes, sales taxes, and property taxes from those people. Just another aspect of the law of diminishing returns.
One wonders if the Sun God might come home from overseas long enough to promise some jobs to people here, not in Asia, which might have financed Obama's election, but Asians certainly don't vote for or finance my Congressoafs and the Prancing Ponies of the Senate carousel. Or at least I don't know that they do. 35 million educated people with work experience, and some fidelity to a trade or occupation, are not an insignificant force if organized. And they could be by some charismatic charmer, as the whole of the country was with Obama. The time to put and and shut up is approaching very fast, and like all those kinds of events, will accelerate as it nears. Jobs. Real, family wage jobs. Not temporary work moving the deck chairs around. Meaningful, full time, productive jobs.
Our lack of oversight of the financial interests, and the need to "do good" allowed the Gliberals to sell the "chicken in every pot" scenario for residential housing, and we got into that "Well, everyone else is doing it!" mind set that our parents 60 years ago told us didn't work for an excuse, and you had better be ethically better grounded than to use that excuse. Too much dope smoking, free love, and generous pensions left us without moral leadership. We had twiddling cigars instead of attention to world problems. We now reap the harvest of that inattention. Millions of non-qualified people bought homes that they and the lenders knew a working man would never be able to make the payments on if there was as much as an economic hiccup. All it takes it a bump in interests rates, and the ARMs blow beyond reach, and instead of making money re-selling the foreclosed property, it became just another chunk of "under performing asset", and in totality, ruined the US economy. Barney Frank can slobber and spit and rant oratorical snideness, but he takes no blame for loaning trillions to people he knew would not be able to pay, but who would vote his party to power is the cards fell right. Having that kind of influence over a Federal load guarantee plan gave him the power. They did, and he is a powerful Congressoaf, proving that being a crook really does pay when you get elected enough times to addict your district to the pork you bring home. Moral leadership from the Gliberals has become an oxymoron in Congress. America expects too little from their elected officials, and accepts nothing. What a state of affairs!!! And the specter of a commercial real estate melt down does not make for a rosy future.
"Millions of non-qualified people bought homes" So who do you blame, Bearbit. The "non-qualified people"? The people who made a killing by bundling the loans into phony securities? Or the politicians who deregulated and then refused to re-regulate the "too big to fail" financial sector? And who do you blame for the "too big to fail" financial sector again paying big bonuses and again making money hand over fist on Wall Street while the working stiff on Main Street suffers through 17.5% unemployment when the no longer looking and part timers who need full time work are counted?
It would appear to me that we are beyond up to our collective ass in alligators, and will it be the alligators or just drowning that is the end game in this deal.
The Junior Senator from my state today was quoted as saying that fining you and putting you in jail if you don't buy health insurance is a power granted in the Preamble of the Constitution. You know, the part that says why the founders wrote the Constitution. I guess he stated that the power emanates from "promote the general welfare" in the preamble. He wasn't a Community Organizer. His niche was Habitat for Humanity Director. Another constitutional law expert parsing words to explain how the world shall work when he has the big stick.
How many people moved here to watch us build and turn it into another California ?
So why the #$#$@# are we doing it ? - MONEY MONEY MONEY. The white man will ruin anything for a lousy buck.