Real Estate History Repeats Itself - But Does Anyone Remember?

Implications: No disrespect intended and without the benefit of an actual survey of the average of analyst attending this conference, I would be willing to wager a large sum that very few in attendance could recall the popular adage bandied about after the Savings and Loan debacle that "there are no more dumb lenders". My grey hair allows me to remind my dear reader that within a year after the collapse of the S&Ls, all those "dumb lenders" reappeared and started making loans again, sometimes on the very same properties that had gone bankrupt!

So too with "dumb investors". As long as so much money is chasing deals there will be deals made at ever lower rates of returns. When the returns get below the current standards (such as next year's ebitda), some imaginative broker will convince the market that the standards should change, perhaps to the year after next. When you can't cure the disease it sometimes is helpful to "touch up the x-rays.

Analysis: Before commenting on the specific real estate sectors I believe are eligible for a near term correction, I will offer a wild guess as to where this next major correction will occur.

China! Almost every type of commercial real estate is either already or in process of being badly overbuilt. A recent comment by a knowledgeable friend and heavyweight buyer of shopping centers in China has said that only 10% of China's shopping centers are profitable!

Another buyer I know recently returned from a buying trip and commented that he had never seen so much speculative activity in warehouses throughout China.

A recent article in the WSJ indicated that by the end of 2006 the will be more than enough new auto manufacturing capacity in China to make every automobile that will be sold anywhere in the world in 2007!

And yet there continues to be a feeding frenzy for China's commercial properties. Soon someone is going to realize that owning largely vacant shopping centers or industrial parks hurts their bonuses.