Is this the beginning of the end of the Commercial Real Estate Bull Market? by Bob Canter Performance Realty Solutions

Implications: Now that the Stock Market has finally come to the realization that the sub-prime credit woes have affected the overall credit markets does this signal the beginning of a commercial meltdown? Does this mean the Federal Reserve will get off their unwarranted witch hunt against inflation? Does this mean the investors that bought CRE investments over the last 2-3 years at ridiculously low cap rates are in trouble? How can there be at once plenty of money in the system for investment deals while the credit markets are as bad as they were in 1998?

Analysis: The stock market has overly reacted to the latest headlines about sub-prime lenders. That being said, where have they been knowing full well that sub-prime means high risk. This is not unlike the late 1980's with the Junk Bond fiasco. Why does the stock market not see past quaterly results? Is there no one watching the store..The Federal Reserve is as much to blame as any real estate lender residential or commercial.

They lowered interest rates to unprecedented low levels which pushed cheap money into the system which in turn allowed invetsors to use high amounts of leverage (financing) to purchase properties. The Fed's actions also permitted the sub-prime lenders to do there thing. Remember the Fed lowered interest rates to halt the last economic downturn, and the ensuing housing uptick helped bring much economic prosperity. What happened is the Feds created asset inflation. Now they decide the party is over and start bringing interest rates back to "normal" levels. That is OK, but to be surprised that the impact would not be deeply felt is just being in denial. Much as when the Fed Chairman says that the housing crisis won't hurt the overall economy.
How can it not...it helped bring the economy out of a recession and it will put it back into one. The media of course is the other part of the blame. The media likes gloom and doom and they harped on the housing bubble so much it's as if they willed it the bubble burst to happen.

The lenders are taking a beating, and they too are not entirely to blame.
You once again have to look at the market dynamics and understand the bond buyers of the CMBS bonds were told these were not Junk status b/c the rating agencies said so. These same rating agencies that are paid to rate the CDO/CMBS isssues.

So now how will commercial real estate investors act...the ones that use leverage to buy investment properties will go to the sidelines with their cash. That leaves forgien investors using cheap dollars or the institutional players. At the end of the day that leaves limited competition which in turn will bring down the prices or raise the cap rates. Is that a bad thing, it depends on who you are dealing with.

The stock market has to stop being a knee jerk responder...and get their heads out of the sand. They knew what could be coming down as a result of the interest rate increases and it wasn't until last week that it decided all was bad with the world.

This shall pass, however, everyone will be affected negatively.
Stay tuned...