GLG News by Robert Canter

Implications: The problem with the survey is in the one detail that has been totally minimized and that would be the financing aspect for all the vultures waiting to pounce...

Analysis:  What investment sales have come to is the thought that any activity is better than no activity in the investment sector. This may be a sign of improvement; however, this writer remains skeptical that as the article points out many would be investors will be looking to take advantage of the price declines in 12 months or so.  

As the article suggests, the assumption of real estate credit flow improving even within 12 months is remote at best. Even when the credit markets begin to return, the equity requirements will make even the most discounted priced commercial real estate unattractive to most investors. Gone are the days of being able to highly leverage or leverage in the least. The sellers will not drop their to prices that will make sense to investors unless they are forced to sell. I would see, as this writer suggested in another article, the private equity sector jumping to become equity partners before “buying” an asset outright. Even private equity will want some form of financing if they were to buy instead of partner. Then you’ll have the high cost of building owners borrowing TI money at extremely high interest rates with mezzanine debt. Prices will have to drop more than the 20% the article suggests for the investment market to begin any true recovery. Those very same folks that sold at 5% Cap Rates will be looking to buy back at 10% or better Cap Rates.  

In addition you have to look at the big picture of the economy in as much as how will the overall vacancy rate hold up in a harsh recessionary period. Add high vacancy with high equity requirements, personal guarantees or even limited personal exposure and all but the hardiest investors will be willing to jump in.  

Just today Chief Executive Bruce Wasserstein of Lazard LTD in an article said the global financial crisis is going to get worse, and consumer credit and commercial real estate losses are just beginning. CEO Stephen Schwarzman of the Blackstone Group was also quoted in the article as saying banks have failed to use U.S. Treasury funds for their intended purpose: stimulating the economy with new loans and that is not good for any type of near term recovery. Blackstone is sitting on Billions of dollars of cash but deal activity has been non existent due to the lack of bank finance.

No doubt you’ll have your same old vultures such as JE Roberts, Blackstone, and several private equity players, perhaps even Sam Zell taking advantage, but we all should forget about thinking there will be a robust investment market climate any time soon, meaning 3 years or more. The average Joe investor will be on the side lines for quite a while.

Implications: Now that just about all those involved in commercial real estate agree the worst is yet to come, folks need to start looking ahead. For those that failed to heed the warning signs its too late to take corrective actions. For the rest, it’s a bit of wait and see, however, the mistake will be to try and time a market recovery.

Analysis:  Timing a market recovery will be much harder to determine than a market downturn. As we have stated all along, commercial real estate is a lagging indicator of the direction of the economy. One could argue the economic recovery will start taking place around the time when commercial real estate has hit bottom or near bottom. The problem is you never know when you’ve reached bottom. The prediction in the article for the beginning of a commercial real estate market recovery will be in 2011. Since that is so far away its hard to second guess that prediction. It does make sense on several levels as long as there are no “wild cards” thrown into the mix of an overall economic recovery.  

Usually the harder the fall the longer the recovery time takes, much like the circumstances in the early 1990’s. That commercial real estate recovery took closer to 5 years when you factor in the finance world’s willingness to get back to any form of real lending to the real estate sector.  

This time around, there will be fewer banks and the securitized debt sector will not have come back or will not be the same as when it went into the dumper. Anyone who thinks the CMBS market will return looking and acting like its previous state is kidding themselves. It took 7-8 years for lenders to even fund new construction, in which the preleasing requirements were very strict such as at least 70%-80% pre-leased. This time, the financial institutions themselves need to heal before any significant lending will resume.  

As there will be fewer lenders for the commercial real estate industry to tap, that means less competition between lenders for borrowers. It was mentioned today the smaller “community” type banks are worried the big surviving banks will begin to acquire them. Those smaller community banks have been for the most part outside the securitized mess on Wall St. They have much healthier statements which will be attractive to the big boys for obvious reasons. This will mean much higher underwriting standards which means the high flying go-go days are probably over for at least the next 10-15 years, or until enough of the bad memories have faded within the commercial real estate psyche such as what happened this time around.  

The silver lining may be the “private equity” sector. It is this writer’s opinion the private equity crowd will come in and fill the vacuum that has been created by the formerly “established” lenders. That being said, they too will demand higher underwriting requirements, and they will become an equity partner. The real estate owners will have no choice but to give up large equity stakes in return for the financing the private equity folks will offer.  

The market can forget any new commercial construction for the foreseeable future and it will be a slower and more methodical commercial real estate market.  

Now if the commercial real estate brokerage community can keep pace with the paradigm shift remains to be seen. They are the slowest to adapt and most resistant to change of any kind. Its this writer’s prediction the brokerage services industry will be reduced by 30%. That is not necessarily a bad thing as there have been too many in the industry just wanting to make a fast buck. But for those true professionals who survive, this will be a challenging time. The brokerage service providers will be forced to spruce up their other service offerings and be cognizant of the future goal of landlord’s which will be to retain tenants as best as possible and keep cash flow stable.  

Investment sales will be almost non-existent until the credit markets come back and the REITS also see a return to higher stock prices, as they too will be locked out of the debt markets for the time being.  

In the aftermath of the early 1990’s many REITS were formed by large developers looking to get out from under horrendous financing conditions. They went to Wall St and it worked. In the beginning many REITS were able to acquire property portfolios based on doing an “UPREIT” transaction which was the equivalent of a 1031 Exchange or like kind transaction. The seller was getting stock warrants in return for the property, so very little cash changed hands. Now with the REIT stocks taking a major hit and no new fresh investor capital, they are basically dead in the water except for those that have standing credit facilities. This writer believes those revolving credit facilities many REITS have access to will begin to be much reduced or taken away as long as the REIT’s stock prices remain depressed.  

The near term fate of the commercial real estate market is obvious, the longer term view is one that will play itself out depending upon a financial recovery and no one knows when that will begin.

Remember the Federal Government has virtually become the only banker in the United States still standing...so its going to be a while.  

Implications: With Unemployment on the way up this can mean only one thing, office and retail vacancies will be on the rise. As this writer has often written over the past 18 months, commercial real estate is a lagging indicator. The lag is over and the market has finally started to catch up to the reality of what has been going on in the credit and housing markets. Those that either pretended there was not going to be a problem or honestly thought the fundamentals where not going to be affected by all of the above have to answer to those that made decisions based on their so called expert advice. Their integrity must now come into questioned. This goes along with the overall crisis in confidence connected to the credit markets which will now spill over to the commercial real estate markets. This ultimately is what this writer had been warning about. And yes a few bad apples can spoil the bunch.  

Analysis:  Commercial Real Estate brokers and other industry “experts” are a lot like politicians. They know people have short memories and can live in a perpetual state of plausible denial. You will now see those that only a few months and even weeks ago suggested the office sector was going to be OK due to the solid fundamentals of the sector. They pointed to the “lack” of overbuilding in many markets which would help save the day.  

The problem with this thought process is its totally flawed. Lets begin with the statement that markets are not over built. If you take New York and Washington DC the number one and two ranked markets in the United States, both have just run into the proverbial wall. The vacancy rates in both markets are on the rise, and as the article points out the rise has gone from a trickle to a steady stream. There are millions of square feet under construction in both markets with NO significant pre-leasing having been accomplished. Overall vacancy for the DC proper market of new construction is 80%. This represents approximately 13 million square feet in DC alone. If this is not over building then I don’t know what is meant by that term. You also can look at any market that had a housing construction boom, say Las Vegas, and you will see a commensurate amount of vacant new commercial construction.      

The next statement to be analyzed is the vacancy rates have been stable and low. That may have been up to this point; however the writing was on the wall for over a year. Now tenants are leaving space when their leases expire or are just staying in place.  

In just today’s Wall St Journal it was reported that retail vacancy is the highest its been in 14 years (1994). Retail has been the first to reflect the declining economy as the unemployment rate has steadily increased. No surprise there...  

As far as office tenants, the last option that tenants have is placing their space on the market for “sublease”. The article points out correctly, subleases put downward pressure on overall rents both in the market and for individual buildings in particular. The article confirms this writer’s prediction of rents going down, by way of ever increasing rent concessions such as free rent, more tenant improvement dollars etc. The next concession that will be resurrected from the early 1990’s especially for all those empty newly constructed office buildings will be landlords taking over a tenant’s remaining lease as an inducement to move into their new buildings.  

The problem this time around, companies of all shapes and sizes are extremely skeptical of the commercial real estate market and are afraid of making a wrong decision, meaning pulling the trigger too soon and/or thinking perhaps waiting a while longer to make an even better deal. The market is almost at paralysis.

In addition many of the construction lenders are hesitant to advance more money to these projects. Add the landlords who have in place financing on their existing buildings and will need to get loans to cover tenant improvements. These loans will most likely be in the form of Mezzanine Financing. These loans are tantamount to second mortgages, except the loan is secured against the entity and not the real estate. These loans typical have a much higher interest rate and many Mezzanine loans are in the mid to upper teens rate wise.  


The next shoe to fall will be those recently bought office buildings in which investors paid incredibly high prices at very low returns with suspect financing and unrealistic rent projections. As once again this writer had suggested it won’t take much vacancy to put those landlord’s under water.  

If you look at what has happened to some of the largest commercial real estate buyers such as Tishman, who bought from MetLife, Stuyvesant Town and Peter Cooper Village in the heart of New York City based on very aggressive financial assumptions, they have burned through their “interest reserve” and will soon be looking for more capital. The conversion time table is now deemed to be have been too aggressive.  

The point of the matter is the entire integrity of the commercial real estate service sector now will be brought into question. Tenants thinking “why didn’t they wait, why did their broker push so hard for us to sign a lease?” “On what basis were the rent projections based?” There will be questions after questions asked, and the so called experts will hide behind the old safeguard statement “Who could’ve predicted this”...

Well to all the readers of GLG we had predicted this in the strongest terms possible.    

Businesses need to be reminded that often bad decisions are made during good times. The reason is human nature, why should one stop doing something that is profitable even though there is no logic or basic reason for their actions, and you can point out that for the long run their actions are flawed. Just take a very hard look at Lehman Brothers and the testimony of their CEO Mr. Richard Fuld Jr. today in Congress.
I'm guessing they had wished they never got so cocky and full of themselves and had been much less aggressive in thier investment approach. But hindsight is 20-20...but not in our case.

Implications: With the current financial problems causing havoc in all sectors of the economy its easy to point fingers at the world of real estate, both residential and commercial. The real problem all started with overly aggressive financing which unfortunately, as we are witnessing, can turn good real estate in bad real estate. When multiple billions of dollars of commercial real estate are traded and the underlying fundamentals of the property’s cash flows hasn’t changed much, what is the one variable that is different? You guessed it.

Analysis:  I have to laugh at the media reports and others who are saying commercial real estate is the trigger that has taken down the major investment banks and the largest insurance company. Of course it has nothing to do with credit default swaps and hedge funds whose best interests have been all along the short selling of the instruments designed to hedge bad bets. Just today it was announced that WAMU is done. Gee what a surprise...NOT. They started the 1% teaser rates for home mortgages. They were one of the biggest proponents of that debt instrument. As for me, they deserved to go under.  

This has everything to do with buyer’s greed in trying to leverage every last nickel out of a good piece of performing real estate which had the lenders stamp of approval because they weren’t going to own the loan anyway. Let the next guy worry about it has been the mantra of almost every lender. Lets approve loans that are based not on current income of a property, but rather some totally unrealistic cash flow projection which is using the last 3 years rent spikes as a normal scenario. Lets not lose sight of the fact that for the past 5 years after Alan Greenspan reduced interest rates to historically low levels, levels that any intelligent business person would have seen as temporary, and as money was being pumped into the system at record levels, would cause ASSET INFLATION the likes of which had to be considered an anomaly. But the lenders did not care, the brokers did not care, and most of all the buyers did not care. All did not care due to their greed and arrogance.  

So back to the beginning, when a commercial property has in place tenants who have been paying their respective rents even if those rents were from 2-5 years ago, why would a buyer try and squeeze that cash flow to achieve which would be arguably a highly leveraged and risky return? We all know the answer.  

So a perfectly stable property with a stable tenant roster can go from being worth X in 2004 to being worth 5X in two short years. Why it is now worth 5 X, is only due to the financing which allowed the new buyer to pay that 5X amount. So what happened is the financing threw the property into under performing status, and the mortgage into default, and the bond holders saying how could have this happened? So why are all these mortgages being devalued...because of the crisis in confidence from bond buyers not really knowing what it is they are exactly holding or owning. This started with sub-prime and spilled over into commercial and other parts of the securitized financing world.
The Wall St geniuses spoiled the party with their greed and fancy financial instruments. And no one, except for a few us veterans of the industry, saw this as a catastrophe waiting to happen.  

So when we read all this news about how the mortgages which have been turned into bonds are going down in value, it has nothing to do with the basic real estate. It has to do with the bond market. Unfortunately because all of real estate and all of the business world is dependent upon the unobstructed flow of capital mainly through the use of debt, the collateral damaged that is being caused is off the charts.  

The vultures will swoop in, because they know at the end of the day, if they can buy or buy back those properties at 2X or 3X they will have a solid investment. That is if this crisis gets resolved without too much damage to the general business world.  

And for those who say in the article that CMBS lending won’t come back until late 2009 or 2011 or whatever date they want to pick are also dreaming. The CMBS market has been irrepealably harmed and will not be resurrected in a form remotely similar to what we have seen before this crisis.    

Implications: The key implications are too numerous to cover in this space. To many of us its apparent that we are on the verge of a major economic meltdown the likes of which haven’t been seen since the Great Depression. The one major implication will be greater rules and regulations that the free market folks will dread, but they have themselves to blame along with all the King’s merry henchmen. This article spreads the blame from the feet of Alan Greenspan to the CEO’s of the major Wall St. banks that allowed greed to take the place of wise and intelligent investing.

Analysis:  Its sad to think that so many got purposely caught up in the greed because that is all what this past 4 years have been about. For these huge Companies CEO’s to have seriously believed the party would never end is all too epidemic throughout the Corporate American Culture. Show me one CEO who isn’t pressured to always exceed the “Street’s” analysis estimates for earnings. Show me a Wall St Market that doesn’t heavily penalize a company’s stock price if it misses the analysis’ estimate by 1 cent. That is the culture that is pervasive which needs to end.  

Its normal to want to make profits, however, the greed factor said never enough profit. When interest rates were at their lowest, investors began chasing returns not 2-3 percent greater than treasuries 30-50 times. This is no different than the Junk Bond problems in the mid to late 1980’s. The higher the return the riskier the investment is the rule. No Duh. So the rating agencies saw no flaw with the exotic and terribly complex financial structures. Everyone nodded their heads as if they really understood, and the buyers themselves are primarily to blame since they drove the appetite for ever higher returns without asking the simple questions.  

This economic upheaval shall pass but not without much financial and unfortunately too real human carnage left in its wake. Wall St., it has been suggested will be forever changed. Perhaps that is a good thing.  

The commercial real estate market will take its lumps no doubt about it. Time will tell exactly how bad. It will also depend on how far and wide this contagion spreads. Since this problem rests with the financial sector and everything is tied to finance, well no sense beating a dead horse. You all understand the ramifications as it relates to real estate.  

The biggest ramification will be the unwinding of all of Lehman Bros. equity stakes, mortgage holdings, partnerships, pension fund investments and so on, and everything else tied to their commercial real estate portfolio.  

Another maybe even more important implication, is the entire philosophy of securitized debt will brought into question. It already has over the last 12 months. This is a crisis of confidence fueled by the collective greed of Wall St. Why would lenders really care about the dynamics of the commercial real estate deal and its mortgage if you are going to sell it as soon as its funded. And not only will you sell it, you will sell it in such a way as the buyers of the debt will have no real idea what it is they are buying exactly. As the subject article states, these debt instruments were opaque    

The delinquency rate for commercial loans has crept up; however, it is still at historically low levels. Maybe it won’t last due to the ripple effect of current events, but the loans if they are performing are not bad loans. They are deemed bad because investors will not buy them any longer. This is what the average person does not understand. The mainstream media does not understand. How could they when the Rating Agencies themselves admitted to not really understanding the complexities of these debt structures. The media just wants to use buzz words and help create the anxiety that keeps readers and viewers coming back.  

There will be billions made by investors buying the “bad debt” at fire sale discounts.  

It is my prediction that no longer will mortgage issuers be allowed to off load 100% of their loans to 3rd parties. Just as lenders require buyers to have an equity stake, so too will the lenders be required to have some skin in the game. This was the problem to begin with. All the off the balance sheet practices will have to end. Transparency will be the name of the game and rightly so. What is truly amazing is there was no lessons learned with the Enron debacle.   

The vultures will swoop in and pick the bones. While this is happening the rest of the property ownership world will see their property values decline due to the fire sale that will take place. For all those owners that have traditional mortgages with respectable amounts of equity, they will be more than fine. Sure they lost some value, but overall they are still way ahead and can withstand any price correction.  

Has their been an overreaction...absolutely. Not all of Lehman Bros. holdings are toxic or that of Merrill Lynch etc. But just as Wall St. penalizes companies for missing their revenue projections, so too the commercial real estate holdings of these institutions will be downgraded. This will have a ripple effect until it is determined there is no more blood to give.  

Can these so called smart folks that put together all these exotic debt structures really think that 1% teaser rates were really a good idea? Can commercial real estate lenders really look at themselves in the mirror and honestly say that 90%-95% LTV with interest only loans was prudent lending? Of course not, is the answer, but it happened nonetheless. The absolute perfect example is Harry Maclowe. He got away with $50 million of equity on $7 Billion in debt. Even 10% equity would be $700 million. Sure he put up his other properties as collateral, and the lenders rightly foreclosed, so the argument can be made he did in fact have more “equity” in the deal.  

Can anyone actual say that 15%-25% annual appreciation increases for both commercial and residential real estate was normal and sustainable. The geniuses on Wall St pretended it was. Home prices historically would range between 3%-5% annual increases in value. The Federal Reserve should have seen it as well since cheap money was the principal driver of the asset inflation. 

Therefore with all the hoopla of Lehman and others having to write down their “bad debt” or devalue the asset value of their commercial real estate holdings et al, it still is 20%-30% or higher than the values of 6-7 years ago. If the values dropped by 20% that would peg most of their values to around 2005-2006. The problem of course the loans were based upon 2007 values.  

What is at the core of this whole debacle is the thinking that asset prices can forever go up at the accelerated pace it had between 2003-2007 and believe that companies and people could afford to pay the rents needed to cover the sale prices paid. The investment brokers who were using “pro-forma” income projections using the last 3 years of appreciated value were OK with the thinking.

MBA’s with all their fancy calculators and financial models forgot one basic element of good business smarts that a first year business major would learn...and that is a workable exit strategy. Not a strategy of lets sell it to the greater fool, which is exactly what was happening. Wages had not gone up in lock step with the asset inflation nor had company earnings, except for the Wall St. Banks. So the retailer who sells greeting cards, can they withstand 30% rent increases? Of course not is the right answer. I had one small retailer say to me 3 years ago that he was essentially working for the landlord. Any increased profits he made did not go into his pocket, rather into the landlord’s. What did he do, he closed his business. Now that is a win-win for all concerned.  

So what happens to all those greedy folks who invested with abandon? They gave it all back and then some. Just deserts is what many will say. However most of those throwing stones were themselves major participants in the reckless greed.  

You've got to love the comments from the very same investment brokers who were selling their over priced highly leveraged properties using totally unrealistic cash flow projections, who now say it was greed and a market frenzy that drove everyone into making bad and stupid decisions. As I wrote a while ago...bad decisions are often made during good times. Everyone wants to follow the herd even if that herd is headed for the cliff.  

It’s the arrogance of the those that think they are smarter than the market and are immune to corrections that are totally at fault as they propagated the philosophy of continuous increases in value. Its also ironic that the real fear Alan Greenspan had, which is why he lowered interest rates so low, and kept them low for so long, was his belief that after the tech bubble crash, there would be massive asset deflation. Deflation happens during a depression. And that is the irony for what he wanted to achieve is exactly the opposite result. He over inflated the balloon until it popped.  

As this writer has said repeatedly, advising clients to do things that make no sense is self serving and will come back to haunt those that behave in this manner. Perhaps the MBA’s that worked for these firms weren’t made to take business ethics courses. They should be mandatory going forward by any Higher Educational institution offering MBA degrees.  

Of course no one wants to take the blame, but all they have to do is look in the mirror as they are selling their beach houses, expensive cars and mid town condos etc.  

If it walks like a duck, quacks like duct guess what, it’s a duck.  

As Mr. Leonard a frequent contributor to GLG, has so aptly and repeatedly pointed out, at least the vast majority of advisers and authors associated with GLG have understood what was going on every step of the way, and had provided ample warning well in advance for corrective measures to have been taken.  

It is my sincerest wish that the Wall St and Commercial Real Estate folks will use this collective brain trust going forward.  

We have proven our smarts from a very street wise perspective, which is what those in the Ivory towers have lacked.

Implications: There have been recessions and commercial real estate bubbles that have burst in the past. The most notable was the 1990's crash. Unfortunately the learning curve for this time around will be an uphill battle for all concerned. The simple reason is no one has had to encountered the multiple credit issues that are so wide spread today, whereby there is no safe haven or easy answer as all manner of business is being affected. This writer had been saying for a long time now, you can not kill the housing market without major repercussions. Add to this toxic mix an entire financial credit system based on securitized debt and we have a problem of magnified proportions the likes we have never witnessed before. Of course there are those cheerleaders that remain in a state of denial whose client’s will be negatively impacted by false hope. Instead of trying to create a game plan or exit strategy, the cheerleaders will be the band playing while the ship is sinking.

Analysis:  The current crisis in the credit markets, which began last summer as a result of the sub-prime mortgage fiasco, has spilled over into the commercial real estate markets.  If any of you thought this might have been short lived you were obviously very wrong and you probably sat around hoping and praying for the best. Well the descent of the commercial real estate market has begun in earnest. As I have said over again, commercial real estate is a lagging indicator of economic events both good and bad. 

As a matter of fact the credit crisis has deepen beyond most experts expectations. Banks have stopped lending for the most part. Not only have they tightened lending on all manner of real estate loans, but in almost every loan product they offer. From car loans to business loans and student loans, they have all been affected. 


Inflation is on the upswing with rising oil/gas prices, and interest rates are no lower than a year ago, they are actually higher. The Federal Reserve has only been propping up the Banking System, not making it easier to get a loan.   

As Commercial Real Estate is especially sensitive to credit markets, this slow down should come as no surprise.  The housing market is still in the throes of a downward spiral with no bottom in sight. And until the housing market hits bottom and starts a sustained albeit less than modest uptick, will there be any loosening in the credit markets.  As a result business has slowed down significantly. 

Consumer spending is on the downswing as reported today now that the temporary economic stimulus checks have been spent, and companies are taking a wait a see attitude. Forget expansion plans, or even considering moving. Companies have begun layoffs which does not bode well for the economy. The number of subleases has increased significantly which puts downward pressure on rents. Rent concessions as the report points out are running above normal and most likely will accelerate to higher values.

All this means we are in a place where most of those in commercial real estate have never been before nor has Wall St, as it pertains to commercial real estate. The most pronounced statement in this report is “An unprecedented number of SIOR members -- 83 percent -- report that their local markets are feeling the impact of the decline in the national economy. This number is 59 percent higher than just one year ago. Leasing activity is down according to 75 percent of respondents.” On top of all this an article written recently in the LA Times titled “Too Big to Fail? We’ll see about that”...is about the enduring memory of the “financial bubble's collapse will be the number of marquee companies either swept away or forced to shrink drastically to survive.”

This means the likes of Fannie Mae and Freddie Mac, along with Bear Stearns, and possibly Lehman, WAMU, and others that have not yet risen to the surface, which are likely to fail or be transformed into something totally different than what they are today. As such this is turning into the largest financial market upheaval since the Great Depression.

And as we know all too well, the commercial real estate market is directly tied to the health of the financial markets. It does not take a prophet to say both the near and long term prospects for commercial real estate is bleak. Therefore, batten down the hatches because the seas are going to become even more angry than they presently are.  

Implications: Although Fitch is using a very reputable company for their data PPR, Fitch’s model for this evaluation is very flawed. This will just perpetuate the misery of the CMBS marketplace and provide false readings as to the underlying health of the commercial real estate that is being secured.

Analysis: When will the rating agencies finally get in touch with reality? The rating agencies are not experts of any kind in commercial real estate and have no idea how to really evaluate property values.  

To use 10 year forecasts and historical performance going back 10 years is a flawed method. It does not take into account current circumstances which by and large will impact the future performance of the real estate assets themselves. It also is not taking into account the fact the overall economy is just now hitting its recessionary stride in  which commercial real estate presently is not overly affected and how it will be performing going forward, as it’s a lagging indicator.  

To use 10 year forecasts is quite honestly a joke. No one can forecast what the market will be like in 6 months never mind over the next 10 years. These are guesses and you can not even describe them as educated guesses because its based on pure subjective fiction. Its no different than the investors who bought in the last 2-3 years at low cap rates and used proforma income models.  


Just look at a recent problem that has been reported by several industry news outlets, regarding a large multi-family rental property in Harlem. Its going into foreclosure because the owner has NOT been able to create the type of “rental” increases predicted by which the property was financed. The predicted Debt Service Coverage Ratio AKA DSCR is supposed to come in at 1.73, but it is currently at .73. This is a property that was purchased in 2005. Upon foreclosure the property is said to be taking a 50% hit in its value. This is a CMBS finance deal.  


This is the problem, even though the Fitch report singles out multifamily and retail, it is not painting a true picture. They should at least utilize the real experts in the field who understand the business from a street level POV.  

Fitch and the other rating agencies did not get it right the first time around, so why in the world would anyone think they can get it correct this time. They haven’t done their homework they way they should have and aren’t interested in really learning about commercial real estate.  


It is a known fact that the bond issuers need some type of “rating” to appease the investors who have no other recourse but to rely on the rating agencies. However, there are secondary rating companies that should be given an opportunity to be as broadly recognized as the big four, S&P, Fitch, Moody’s, and A.M. Best and who have far less to zero conflicts of interest. They can’t do a worse job than the big four have already done and seem to keep doing.

Implications: Timing is everything in business and life. With the drum beat of bad economic events all around us, there will become a tipping point whereby it will make sense for investors and tenants to take advantage of the downturn in the commercial real estate market if they survived to that point in time. The key question is when will the alarm go off?

Analysis:  This question can’t be answered with any real accuracy. The old adage says you never know when the market has peaked nor do you know when the market has bottomed. It is this writer’s opinion the commercial real estate market still has a way to go before it reaches its so called bottom. The declining fundamentals have just now become evident in statistics. The DC Metro market as the article points out reflects the plunge in investment sales throughout the region. It also goes on to highlight the lack of leasing activity. If you recall, most of the pundits predicted the credit crisis would be over by the Fall of ’07. This writer actually predicted that was just the beginning and pointed out how the contagion would spread. And spread it has. Just yesterday there were several media reports telling us how banks have across the board without exception tightened credit even more and have expanded their new stringent lending standards to all variety of loans. This tightening has occurred in the face of the Federal Reserve propping up the banking system. As this writer pointed out when the Fed started their banking bailout, their actions would NOT lead to any significant lending to both businesses and consumers. As a matter of fact, the situation has gotten worse. That report also pointed out that 80% of the banks in the survey said they don’t expect to loosen credit for at least another 12 months.    

So the question becomes how in the world can the economy stand up in the face of one of the most widespread credit upheavals in modern times? The answer for the realists is it can’t. When credit, which is the life blood of business, not just real estate, is cut off, which is what is essentially happening now, business falters. When the consumer which is responsible for two-thirds of the GDP can’t obtain credit, what happens? You all know the answer.  

Since commercial real estate is a lagging indicator of the economy and ultra sensitive to financing, and the reported fundamentals of rising vacancy, lack of tenant activity, and over building are just now kicking into play, this means now is not the time to take advantage. This market, as well as many United States MSA’s have not nearly reached bottom due to fact the credit markets are still 1 year away from any correction, or even being ready or wanting to get back into the lending business, and the 1 year prediction. is a big maybe!  

That being said you will start to see much more pain become inflicted on the commercial real estate market. Companies are laying off workers all over the place, job growth even in the DC Metro market is off 50%, and yes the area is thankful there is still positive job creation, but this can not last. Government spending has been greatly reduced in the area, local companies can’t fund new projects, and with the uncertainty in the economy many companies are on the sidelines waiting to see how this all unfolds.  

Does this mean business comes to a complete halt? No not at all, but it will sure seem that way especially after the way it had been going between 2003-2007.  

As the economy continues its slide, it will be a while for the commercial real estate market to feel the full impact. What you should be looking out for are defaults by the non-institutional investors who bought during the boom, at very thin margins, 4.5%-6% cap rates, with the expectations of higher rents down the road and a low vacancy market. Also keep an eye on the large amount spec office construction going on here in DC Metro that is being built as this is being written with no prior leasing commitments. When you see those spec office properties going into default that will be the best time to strike. Tenants will be able to make sweetheart deals for themselves if they have the guts and foresight, and investors can jump back in if they have cash in their pockets or foreign money, and begin buying probably at 50-70 cents on the dollar. Remember REIS and Moody’s and other data companies have already suggested the market has lost approximately 15%-20% of its value in the last year alone. Please discount the scant recent sales by foreign investors at record prices around DC. The currency play made that possible.  

Therefore those tenants that have a year or so to go on current leases, start getting your ducks in a row because you won’t want to miss the next great tenant’s market. You’ll get favorable lease rates, and wonderful concessions such as free rent, higher work allowances at no additional charge, and a host of other benefits, and the best part you will be able to upgrade your space or address. And if you just want to renew at your current location you will still be able to get a great deal too, and don’t worry about your high priced option rental rate or annual escalations. If you are occupying a decent amount of space in your current bldg, you will be able to practically write your own ticket.

This why the property reps are trying to fend off "bad news" and make the rest of us believe the market is still strong and OK etc. They know in their hearts this is just the beginning of slide not seen in a long while.  

So to all the cheerleaders out there, most likely on the bldg representation side, if you wish to continue making money and that applies to your landlords as well, its time to begin dealing in reality and advising your owners to be ready to deal. It will serve them no purpose to continue to be stubborn because of the unfounded belief this DC Metro Market is immune to negative influences. Even New York is fighting the tide and losing.  

What all you cheerleaders are doing is continuing the disconnect between buyers and sellers and tenants and landlords. This time around time does favor the buyers and tenants, not the other way around.

Implications: When major service providers manipulate their statistics to paint a different picture than what is true reality, how can that benefit anyone in the industry or better asked the uneducated commercial real estate consumer? It also provides a disservice to their client base that rely on honest and objective information and advice.   No wonder we are in a world of hurt, and just because CBRE the largest Commercial real estate service provider says so doesn’t always make it so.   Just take a look at what is currently going on with the rating agencies in which it was announced today in the WSJ that after a 10 month investigation it has been discovered combing through 2 million emails that several analysts were concerned about the quality of their ratings they assigned to bonds backed by sub-prime mortgages...no doubt that has carried over into the commercial CDO/CMBS world.  

Analysis: The business world needs to regain a level of integrity...what is going on now is making the halcyon days of the 1980’s look amateurish.

The problem with statistics which this writer has brought up before is they often times can paint the wrong picture. That is not to say statistics aren’t valuable. However, accurate and objective statistics are what is needed.

When looking from the outside most non-real estate folks have no idea how the market stats have been derived. Most do not even understand what they mean. The problem is when a company such as CBRE skews its stats in contradiction to known reality by everyone else in the business it is bad because of their status as the biggest and broadest service provider.

So what’s in it for CBRE to skew stats one must ask? If you predominately represent property owners, you want to paint as rosy a picture because it helps their clients the property owners in lease negotiations. And since CBRE represents so many more landlords than anyone else in almost every market area it’s in their best interest to portray a rosy picture.

The problem with stats especially coming from a brokerage service is they don’t disclose how they arrived at their figures. Most brokerages although they use common data sources don't always publish the same results...For example some brokerages only report on office buildings 20,000 sq ft and up, while others go from 10,000 sq. ft and up.


Another example, in a different article on the same topic, one of the CBRE’s head researchers talked about the positive absorption in DC proper. They actually used, according to the statement made in the article, a large space lease renewal in the absorption number. That is just wrong methodology. The space never came onto the market and therefore never came off the market, so its a neutral number and should not have been factored into the absorption rate. By using the renewal it makes it seem as there is so much more leasing activity than there really is.
I

n addition its nothing to get excited about that a 276,000 sq ft renewal took place in a market as large as DC. 

The subject article further speaks to how the new "construction pipeline is pretty positive for Northern Virginia," Marianne Swearingen, research manager with CBRE, told CPN today. "It has actually stabilized the market because properties are being built specifically for companies. And the way the market has gone, developers have started to hold back on plans if they can, so there's a more balanced pipeline in Northern Virginia.” The problem with that statement is the fact there is over 4 million square feet of new construction underway to be delivered this year into the beginning of next, and only 20% has been preleased. That is a stabilized pipeline? I don’t think so. Never mind the new construction that is taking place in DC proper of 16 million sq. ft. again with only a 20% pre-leasing ratio. Of course there are not going to be any “new” projects to be built in the foreseeable future. And this is not a stabilized pipeline by any means.  

At least they are being accurate about the Suburban Maryland market, as it would be hard to paint a rosy picture on that since there are no amount of stats that can be manipulated to say otherwise.  


People within the industry are always asking themselves why brokers have such a bad reputation with the general public, usually one degree higher than used car salesmen, this is a prime example of why the perceptions are bad.  


When even the large firms begin to sacrifice their integrity for the sake of self preservation, its time the buying public stand up and take notice. There is a reason that CBRE’s stock price has plummeted, its due to their decrease in overall sales and leasing activity. They can’t skew those numbers. So how does their deal volume jive with their own market stats...they don’t.  

Implications: The Key Implication is this investment behavior is so far over the top and wrong, that its is going to hurt a lot of innocent people and the tax payers. CEO’s of Public Companies have been put in Jail for such bad investment behavior. Furthermore the pension fund managers can’t even report on how their investments are really doing or what they are even invested in as per the subject article. The Politicians have allowed this, so while they cry about the Iraq War, Global Warming and the need to invest in Politically Correct ventures or other hot topics of the day, they dropped the ball big time when they passed legislation which allows for Pension Funds to invest in Private Equity Funds. You have this looming disaster coming along at the very same time as the Baby Boomer Entitlements are about to kick in... This is going to practically bankrupt the United States.

Analysis: This pending disaster is unconscionable period.

Please keep in mind as this rather long article points out, the Public Pension Funds have been allowed to invest in these Private Equity Real Estate Funds only by the consent of State Governments.

The reason they need to get the State Government’s OK is due to the fact the Private Equity Managers demand that their investors execute confidentiality agreements or they won’t permit them to invest.

Public Pensions Funds are not allowed to invest in non transparent investment vehicles unless otherwise authorized.  

One would think that State Governments want to know where their money is being invested and are those investments in the best interests of the public at large never mind protecting those folks who have invested their hard earned money over the years into their public pension funds.

This is why special legislation is required for the Public Pension Funds to invest in Private Equity Funds.  

In this period of many State's having major Budget issues and being under extreme stress and raising taxes of all kinds already, the last thing the taxpayers need is to bail out public pension funds.


This Investment behavior as far as this writer is concerned is not only thoroughly immoral and unethical, but should be criminal as well.  

The investors have no idea what their real returns are and it’s the investors that take the hit if the investment goes bad, not the fund managers who collect their exorbitant fees no matter if they invest or not.  

This should be a scandal like no other as I would suspect that the Pension Fund Managers need to be closely looked at for any kind of “incentives” they may have been provided to be lured into these admittedly high risk investments.  
Why was it not good enough to invest in Public REITS or even buy the Investment Properties Directly or partner with these Private Equity Funds, rather than plunk their money directly into these Private Equity Funds which can not be called into question as you will read?  

This is outrageous and this needs to be brought into the light of day.

Who knows where these investment dollars are winding up, perhaps in the wrong hands? No one knows for sure nor can anyone know based on the rules of the game for Private Equity Investors.

Have the Pension Fund Managers fully disclosed to their pensioners they have invested in  non transparent vehicles and is that OK with them?

Government is supposed to be open about such matters, as these investments should not be treated as National Security Secrets.  

I just hope that Government Watchdogs get on top of this as soon as possible, although its probably too late already.  

Implications: The DC regional commercial real estate market is beginning to feel the pain of the slowing economy. And As this writer has been expressing there are those still in major denial. By sitting back and watching Rome burn, they are contributing to the continued decline. At least some landlord's are finally seeing what they need to do.  I had written an article for GLG over year ago which was titled "Why the DC Market is not where the smart money should invest" Now you see why. All the gains of the past 3-4 years are being given back. Those that bought at historically low cap rates with easy credit based on pro-forma projections will be in a world of hurt fairly soon, along with the spec office builders. The silver lining is many of those are being built by institutional developers who hopefully can withstand the down cycle.

Analysis: This article is posted so that there can be not doubt about the state of DC Regional Market. There are those that are apt to put lipstick on the pig, but that doesn't change what is going on and it won't change the ripple effect.

Owners are beginning to offer extensive rent concessions which is good for tenants after years of a landlord's market. Landlords don't offer such unless they see a dearth in leasing activity as the one landlord highlighted in the article. That being said the overall corporate decision is to stay put which is why the article has pointed out the highest lease renewal rates in quite some time.

It was also reported this week that 25% of the area's banks lost money last quarter...shouldn't be a surprise.
As this writer has always written, credit availability drives real estate.

The market players are finally seeing the light...well maybe the enlighten ones at least.

Implications: Fasten your seatbelts because its going to be a bumpy ride. As this is just the beginning of a down cycle in commercial real estate, there will be a major shake out or as some have said a culling of the herd.

Analysis:  Not much needed other than noticing the widespread nature of this downward market. And the problems will continue to compound themselves. As this writer has been saying, you can’t kill such a major part of the American Economy as the housing market without major collateral damage to other aspects of the overall economy.  

I would disagree with the one aspect of the article and this the optimism for Industrial real estate in the major port areas. As the economy slows so do imports. Even with the weakened dollar supporting the United States’ export business; it would not appear to be enough activity to sustain current levels of occupancy.  

Just remember one person's pain is another's joy.
There are funds  being created to take advantge of this cycle...
These funds in my opinion are too early to be in any buying mode.

The other interesting aspect is the broker comments about the disconnect between tenants and landlords. Its the landlords who are in denial not the tenants. Tenants will dictate the demand. Owners react to demand. As the fundamentals weaken, you'll see what has already started to come about which are major leasing concessions by the landlords. That sinks the effective rents.

Stay tuned...

Implications: The ECONOMIC news is not getting any better, as a matter of fact its getting worse. And yet there are still those in the commercial real estate industry that keep looking for the silver lining as if that is what is going to save the day. What this does is create false expectations which by now, the public is demonstrating more wisdom than the so called professionals. A Perfect example is the latest report on consumer spending...Gee why aren't all the retailers jumping for Joy? The reason is simple. The consumer spent their money on basic needs food, fuel and living essentials. Very little discretionary was happening.

Analysis:  This writer predicted the current state of the commercial real estate market not only in terms of investment sales as the article points out but the lack of overall leasing activity in most if not all of the major markets over a year ago. Remember all those folks that predicted the credit crunch would be over by the end of the summer 2007.
Guess what, it going to be 12 months next month and there is still no resolution in sight, not even close based on the subject article.

Commercial brokers who just at the beginning of 2008 had predicted the fundamentals were still good to excellent for leasing activity are just now FORCED to change their tune, otherwise lose all credibility.  

For those within the industry and those who report on those same folks about how the market is soon to recover still do not read or follow the economic state of affairs. How tunneled vision can they be?


As this writer has been saying repeatedly, the commercial real estate market takes months to begin feeling the effects of an economic downturn. And yet there are still those who track it like it was a daily commodities market.  


My Colleague Mr. Leonard rightfully pointed out the poor reporting being done by such publications as the Wall St. Journal. They state the obvious with whatever spin they are being fed, but take no initiative into really doing their research on the topic of commercial real estate.

To know commercial real estate you need to know the economic drivers and trends that effect the industry. The commercial real estate industry does NOT exist in a vacuum never has never will. 

At least this article provides the necessary insight and facts to back up its conclusions.  


It will be no doubt be a long haul before the CMBS market returns and when it does it will be in a different configuration than it is now and has been.  

Of course it has to start with the rating agencies that are still in denial. They have stated they don’t like the proposed regulatory changes they will be forced to swallow...too bad about them. And as this writer has stated previously as far as I am concerned as well as should any intelligent investor of any variety be concerned, the rating agencies have lost all credibility and should have lost all investor confidence. But sadly that is not the case as yet.  


Therefore any commercial real estate owner looking to finance or refinance a property, better be prepared to pay higher interest rates with less than favorable terms and much more equity required. This will not change for several years. The last debacle lasted almost 7 years...

The next prediction based upon the Federal Reserve is the failure of many banks that have construction loan exposure.  

So let us see what the experts and news media will have to say and report on this development. I am sure they’ll be an air of surprise on their respective parts.

Implications: Now that the numbers are coming in, there is no doubt the commercial market has just begun to feel the pain this writer has been predicting. The only question is far down can the market go and for how long. All indications are it will be a decent decline probably not the worst in terms of historical standards but it will last for a fairly long period of time. However, although the United States economy is very resilient there are major factors that could derail this resiliency and hence impact the commercial market for some time to come.

Analysis:  The commercial real estate market’s statistics have finally demonstrated what this writer has been predicting. We all knew and its been evident for a while that property prices are in retreat. The real question has been when will the market see leasing activity begin to be impacted by the sagging economy. There are those who want to keep a happy face on things, especially in the Washington DC Regional Market, where every area’s statistics are confirming a down turn, but no area admits it is affected. In other words, any decline has not been in their particular backyard. It was inevitable the leasing activity was going to dramatically slow down. If this is happening in what has been the second best commercial market in the Country, what does this say for the rest of the Nation? Rental rates although having increased by small margins has been off-set by the rent concessions being negotiated.


As the article points out the range of free rent alone has been between 3-12 months. This level of free rent concessions has not been seen since the depth of the early 1990’s commercial real estate implosion. Keep in mind a 3 month rent concession on a 5 year lease term is a 5% reduction in rent. On a 10 year term its represents 2.5%. These numbers completely off-set any “gains” in the rental rates. This also does not take into account increased Tenant Improvement dollars being offered. Furthermore the article highlights how companies are staying put rather than move.

Therefore the new construction that has taken place in the DC Market and anywhere else for that matter with virtually no pre-leasing is in for a major problem as well as being problematic for those lenders who provided the construction loans for these projects.  

Keep in mind that as of the 2002 the share of securitized commercial loans that were fully amortizing -- or structured to be paid off in full by the end of the loan period -- fell from more than 92 percent at the start of 2002 to just 13 percent by mid-2007...those are pretty dramatic figures.   Further as reported on Bloomberg...It is quite possible that the tighter credit conditions and economic slowdown has barely started to filter through,'' Merrill Lynch & Co. economists Sheryl King and David A. Rosenberg recently wrote. ``We have little doubt, though, that it will. In spades.''    


This article is focused on the Office Sector; however, the retail sector has and is continuing its downward spiral. It’s a matter of time until the Industrial sector sees a drop in leasing activity. Keep an eye on the vacancy rates and leasing activity in the major port areas such as Los Angeles, New York/New Jersey, South Florida, and New Orleans. With Consumer confidence waning (its at the lowest its been in 28 years) and gasoline prices still on the rise to record levels, there is no doubt this will keep a cold chill on the economy.  

The ever rising gasoline prices has already been felt due to its inflationary impact on most consumer goods despite what happy spin the Federal Government wants to put on the inflation numbers. Its laughable they always exclude food and energy, but as we all know those two items are the staples of our standard of living. So if those items are going up at a rapid pace, so is inflation.  

The other interesting spin that has been reported, is the notion the credit markets have finally hit bottom. It may be good for the banks themselves, as the Federal Reserve’s strategy has been working, and that is keeping the Banking industry afloat. However, this does not mean credit for the business and consumer borrower has become any easier.  

My friends in the Franchising Industry have told me that franchise sales have dropped significantly. The worry here is this impacts small business.  

It seems everyone overlooks the great importance small business has on the national economic footprint. Small business in the aggregate has been the primary creator of jobs for the past 10 years creating 75% of all new jobs. It represents more economic impact in the aggregate to the National GDP than the major corporations.  

So unless the situation with gasoline and overall energy prices begins to settle down, the banks begin lending more aggressively and the housing market hits bottom the only direction the commercial real estate market has to go is down.   

Does anyone for an instant believe these major factors are anywhere near resolution?

Implications: What the subject article is telling us, there is a lot of fools gold out in the market. As my previous post suggested, Wall St. can not be trusted. So this leaves investors in a real quandary as to where to plant their money. Knowing this and understanding that corporate earnings are under major stress, will investors go back to seeking or better said chasing unrealistic returns or will conservative investment take hold? What should investors be on the look for, the proverbial what’s next...

Analysis: Further confirmation of the detriorating economics conditions continue to make headlines on the business wires.

More layoffs have been announced within the financial sector of over 90,000 in April on top of almost 57,000 in March much of which is related to high price of gasoline; Home Depot is closing 15 location for the first time in its history costing another 1300 jobs, and the venerable Warren Buffett has stated that he now believes the current economic downturn, will be longer and deeper than he previously thought.


As the economy continues its downward spiral, the real question investors must be asking themselves is where to invest their money. As having survived 5 major downturns there are insights into where one can invest. In commercial real estate, if investors are willing to take a long term position, and realize lower but more consistent returns there are properties that will be worth taking a hard look at. The clue is to ask what products and services will be in highest demand taking into account the United States demographics and how will those factors impact the future.


The answer lies in the aging Baby Boomer Population the largest single demographic category in the United States. What will their needs and wants be going forward? Will certain geographic areas of the United States be more attractive than others for this group? Keep in mind this group does not act like their parent’s generation. This generation will remain as active and involved until the bitter end. This demographic will not go silently into the night.          


Therefore here are some of the categories to be on the look out for, and the related commercial real estate that will service these industries and subcategories in some manner, shape and/or form. These are in no particular order of importance or ranking.
1.Long Term Care facilities

2. Pharma Industry et al.

3. Medical Device mfg and supplies

4. Senior Housing, “Life Style” and retirement facilities that allow for grand kids

5. Health & Fitness (Including Food/Diet)...Boomers have become very health conscious. Remember 50 is the new 40.

6. Drug Store sites and existing occupied stores such CVS, Walgreen’s, Rite-Aid etc. Boomers need to fill their Rx.

7.Wholesale Clubs...everyone is looking for bargains and to lower costs for food and other staples.

8. Recreational/Travel formats for baby boomers, such as golf, RV, Travel related to older folks. Upscale resorts.

9.Financial Planning and Estate planning...haven’t you seen the Dennis Hopper “Ameriprise” commercials?

10. Banks...Small to medium size banks who are focused on small-medium sized businesses. (They avoided the current mess)

11. Luxury Automotive-Hybrids...Boomers are on the top of the economic food chain and have a green consciousness.

12.  Adult Education...Boomers are always interested in more learning and re-inventing themselves.

13.Tech Colleges...with the cost of traditional college over the top, specialty education will be attractive. High tech needs repair and maintenance no matter how bad the economy....as a matter of fact; most companies and people will look to extend the life of their Hi-Tech gadgets, especially their computers. This is a good avenue for the Shadow Boomers (Kids of the Baby Boomers, another large demographic)...its hard to juggle college costs with starting second careers as self-employed business owners.

14. Second Career Counseling...with the current crop of lay-offs Boomers will want or HAVE to do something else. They'll need help figuring it out.

15.Franchise Businesses as Second Careers, especially service oriented ones, not food related.

16. Environmental enterprises (Green Initiatives) Remember it was the Boomer Generation that started Earth Day in the Early 1970’s.

17. Internet...with the cost of gasoline, why travel if you can purchase products and services on-line.

18. Data Server “Hotels”...the Internet is not dead, its more robust than ever, greater demands for computing/network capacity.

19.In-home entertainment electronics and accessories. Boomers love to party and entertain and its cheaper than going out. Yes I know CompUsa is gone and Circuit City is in trouble, but Best Buy is doing very well.

20. In-Home Fitness...again why drive when you can exercise at home. Equipment mfg, distributors, and stores. Look at Ballys' and you see this trend.

21.Civil Engineering/ Construction directed towards infrastructure repair, replacement, and new. Consequently companies that supply pipes, concrete, steel etc.  


As I am sure I have missed some, you get the picture...good luck in your investment endeavors.    

Implications: As the article so vehemently proposes, the worst is yet to come. The bottom of the commercial real estate down cycle hasn’t even been reached yet and there are those who are claiming the return of the good times are just around the corner. Is this a fantastic case of wishful thinking or do these folks know something the rest of us missed? What this writer suspects is once again major industry players are in major denial, or as the saying goes misery Loves Company. If you follow their unjustified optimism you will be in total misery.

Analysis:  The first thing to realize when sorting through all the noise and sound bites of the financial news is Wall St. is the most self serving institution on the planet. Remember stock traders (brokers) make money in up markets as well as down markets, as long as there is trading volume. That is how they get compensated.  

The Banks are rushing to bail themselves out so they can return to profitability for their shareholders or least the top executives who just recently replaced the deposed Emperors of their financial worlds be next on the chopping block.

The Federal Reserve is doing everything in its limited power in this new age of Global Markets to fend off a banking crisis. The sad truth is they are trying to ease the public’s mind by actually promoting what they are going is helping the business borrower by lowering their rates. This has worked only modestly with perhaps Home Equity Loans, but the inconvenient truth is borrowing has gotten a whole lot more expensive if you can get a loan.  


What is happening as the article points out are markets are in the process of balancing themselves out.  In other words the bubble has finally burst on a Global scale.


The United States has been existing literally on “borrowed time and money”. That works well as long as there are no glitches in the financial system. However the markets have gotten way out of balance. So too had the prices being paid for investment properties with cheap debt. Smart investors would have known this and not fallen prey to the overly leveraged return. I guess one has to ask the definition of “smart investor”.  

So what happened in commercial real estate is the same thing. Investment properties were bought with the same mindset, with the thinking nothing could go wrong. Maybe its because there are newer players in the industry that never experienced the early 1990’s commercial real estate implosion or the other 4 major recessions prior to that. Perhaps they never waited in gas lines or saw double digit interest rates and inflation rates and typical vacancy rates in the mid to upper teens in almost all sectors of the commercial real estate universe.


Perhaps they weren’t witness to the 1987 Stock Market Crash that wiped out half of a trillion dollars in stock holder equity in one day which then took 3 years to hit the commercial real estate markets along with the realization the market had become over-built.  

Here in the DC marketplace for example, it has come to roost once again with close to 20 million square feet of new office construction and only 20% pre-leased. This of course has created double digit vacancy rates with no short term horizon on when these will be filled. One local economist has put the current vacant inventory at 3-5 years in which to be absorbed. And yet there were two investment groups that decided to pay over $800 psf in the face of that.  


So sadly these same people have bought into the Greenspan can do no wrong mindset. The Federal Reserve can fix everything. Our politicians can come up with some nonsensical amount of money to hand to all tax payers as if that is the cure. Unbelievable is what this is all is.  

In addition you have a current ailment afflicting our culture which is the utter lack of taking responsibility for ones actions. It must be someone else’s fault, but don’t worry all will be fixed like new in any time flat. Just look at the United States Citizen’s mentality of 5 years out from 9-11-2001. Its as if that tragedy occurred 50 years ago. If the problem can’t be fixed immediately, go on to the next thing.  Americans have a very short attention span. It’s a cultural ADHD.  


Well boys and girls the free ride is over. As my colleague Mr. Leonard had so eloquently pointed out in one of his recent posts we have many long term issues that need our attention. One of which will be the lack of clean water. The other is our long term health care for the soon to be retiring baby boomers and the cost that will create for everyone. These will be problems to be dealt with for multiple generations.   Clean water & air, the cost of oil and gas, Middle East Conflicts that will not go away as much as everyone wants to pretend will. The politicians from whichever Party do not want to deal with these issues. Why, because it might involve sacrifice of some variety or very hard unpopular decisions to be made. Our roads and utility infrastructure is beginning to crumble beneath our very feet. Will politicians raise taxes to pay for this, of course not? The article is on the money when it reveals that we are in for a long term readjustment of our Standard of Living.  


I know those on Wall St. and many of the Top commercial real estate players will not want to help pay for solving these issues as it may mean giving up the life style they have been accustomed to for a generation. But unless the mentality changes we are in for an even longer period of downward adjustment.


If the Federal Reserve can bail out Bears Stearns, why can’t the Federal Government bail out our long term needs? No need to answer it was a rhetorical question.  


And just because some sales person says the problem is solved, its OK to jump back in the water, you should stop and think and ask a simple question...How was the problem fixed and does it make sense, and for how long is the fix going to last.  


Its no different in commercial real estate, as its vitality is based on the economic strength of the United State’s economy. And when you read along with the other sound bites which company has laid-off workers or which companies have filed for bankruptcy that is when you should realize the commercial real estate market is still headed towards its bottom. Always keep in mind Commercial Real Estate is a LAGGING Economic Indicator.


Its Ok to be optimistic, but you need to have a logical reason to be optimistic in light of current and more importantly, future circumstances. Otherwise its called being foolish.  

Implications: As the article refers, the current credit crisis will be with us for quite a while. The ripple effects are great and deep. As this article points out there are new investment funds that are being created for the sole purpose of picking on the carcasses of distressed real estate debt and the properties themselves.   Today April 18, 2008 AT&T and Citigroup announced large layoffs, jobless claims shot up again in March. There have been several announced retailers filing for Chapter 11 Bankruptcy protection, which many believe will be Chapter 7 and out.

Analysis:  The problem within the credit markets will continue for the foreseeable future as the article demonstrates. Not only do you have lenders not lending or issuing new credit facilities, you have a virtual standstill in all credit products at all levels. Once the economy begins its decent, it will be a while before commercial real estate will truly feel the full effects of the current situation. The financial sector alone has shed hundreds of thousands of jobs, auto plants will be closing, and worker pay hours have been substantial reduced, which is one step short of being laid off.


Consumer confidence has eroded to close to twenty lows. Auto sales are in the tank, gas prices are approaching $4 pg, and inflation is seeping into all products and services due to the escalating cost of oil which is in record territory.   Will the news get any better anytime soon...this writer does not think so? This is just the beginning of a painful downward cycle which will ultimately hurt the fundamentals of commercial real estate even if it is not evident statistically yet.The cascading effect is just coming into focus.  

The thought about 4 months ago was the great savior for commercial real estate finance would be the Life Insurance Companies and Pension Funds. The unintended consequences as the article points out are those traditional mortgage sources are going to remain as conservative as they have always been and may even rein themselves in somewhat more. Their asset allocations are being driven by the decline in the equity markets which is throwing off their investment ratios. In addition many Life Companies and Pension funds have ownership/investment interest in many of the CMBS or securitized bonds. This is also throwing them a huge curve ball.

The Major Banks are in a holding pattern as they try and get themselves out from under the weight of their own mortgage problems. The Federal Reserve’s interest rate play is not translating into more lending as interest rates for borrowers are not getting any lower. The underwriting standards have gotten more restrictive which results in less qualified borrowers. The Federal Reserve is trying their best to prop up the banking system with the interest rate play and that is their main objective.  

On top of all this, the Dollar is continuing its nosedive which in turn keeps the price of oil going up and lastly unemployment is going up.  

Yet despite all the bad news, miraculously commercial real estate fundamentals are remaining steady. WHY you ask? This is because it takes many months or even years for the full effects of an economic slide to be felt in commercial real estate. However keep your eye on the commercial “sublet” market along with the unemployment figures; that will be the