Commercial real estate woes
Residential real estate isn’t the only over-valued market, at least according to PriceWaterhouse Cooper who issued a report Monday for the Canadian commercial real estate market:
“We’re very pessimistic, and we think there are going to be big issues in the Canadian real estate market,” Holly Allen, managing director for PwC’s real estate practice in Canada said in an interview.
“We think there are going to be foreclosures and default situations on some of the buildings.”
Allen said Alberta is particularly vulnerable, due to an oversupply of product and weak demand driven by tumbling prices for natural gas, which represents a significant portion of the province’s energy industry.
The report blames scarce money — and therefore limited buyers — for the sector’s woes. As well, it said, investors’ appetite for commercial mortgage-backed securities has dried up.
“The credit crisis and ensuing recession have dragged commercial real estate markets into very trying times, marked by value losses, rising foreclosures, and reduced property revenues,” Frank Magliocco, leader of PwC’s real estate practice in Canada, said in the report.
We seem to be facing a pessimistic outlook in many sectors, yet residential real estate here in Vancouver has defied expectation and had a mini-bounce lately. Will the commercial sector likewise defy expectation?
Full article in the Vancouver Province.
August 19th, 2009 at 8:47 pm
The Greenback Effect:
http://www.nytimes.com/2009/08/19/opinion/19buffe…
The current account deficit — dollars that we force-feed to the rest of the world and that must then be invested — will be $400 billion or so this year. Assume, in a relatively benign scenario, that all of this is directed by the recipients — China leads the list — to purchases of United States debt. Never mind that this all-Treasuries allocation is no sure thing: some countries may decide that purchasing American stocks, real estate or entire companies makes more sense than soaking up dollar-denominated bonds. Rumblings to that effect have recently increased.
Then take the second element of the scenario — borrowing from our own citizens. Assume that Americans save $500 billion, far above what they’ve saved recently but perhaps consistent with the changing national mood. Finally, assume that these citizens opt to put all their savings into United States Treasuries (partly through intermediaries like banks).
Even with these heroic assumptions, the Treasury will be obliged to find another $900 billion to finance the remainder of the $1.8 trillion of debt it is issuing. Washington’s printing presses will need to work overtime.
–Warren Buffett
August 18th, 2009 at 2:48 pm
Fed Up With the Fed
By Bill Jenkins
August 17, 2009
Pylesville, Maryland, U.S.
http://www.howestreet.com/articles/index.php?arti…
Article shows how the Fed(US) was doing exactly as it wa planned, which was to protect the bankers and make the taxpayers foot the bill, "taxation via inflation" etc.
This is smellier and more corrupt than I thought.
===============
In addition, another party Dan Amoss, claims a major US bank , 192 years old with 37,000 employees will have its stock collapse. He will announce which bank on Monday August 24
https://reports.agorafinancial.com/ssronedollar/E…
Here’s Why Dan Thinks
This Bank Will Get Slammed
It all boils down to a few very simple things.
This bank made risky loans to people who, unfortunately, are losing their jobs quickly…
Without jobs, these people won’t be able to pay the bank back…
The bank management is using accounting tricks to hide these losses from their shareholders, while some of the same executives even appear to be quietly dumping their own shares at peak prices…
But they can only “fake” it for so long…
If those loans finally default, it’ll set off a cascading effect of losses… lower earnings… and a draining of cash…
With no cash, regulators could force this bank to cut their massive dividend. And this dividend cut would force their share price to plummet — maybe as much as 50-75% in a day — as folks race for the exits.
If you’re interested in learning how to make money from this situation, here’s why it’s urgent that you act right now…
News is already starting to leak out: A major rating agency just cut this bank’s outlook to negative.
And, in a warning sign I’ve never seen before, this bank’s own employees are speaking up — questioning management about the fudging of numbers on their most recent earnings conference call.
August 18th, 2009 at 2:39 pm
NO -LYMPICS:
Greed is ubiquitous. However the game has changed and the commercials are 'getting it' faster than the retail crowd. The extended nature of the cycle due to government intervention lulled even the smartest people into the vacumn of 'a new paradim'. Look at Warren Buffet for example who stared the cycle down until even he broke down and started drinking the bathwater only to get burned along with the rest of us.
"Fool me once, shame on you, fool me twice , shame on me.."
August 18th, 2009 at 2:22 pm
Balzac mall project more than 80% leased, developer says
http://www.calgaryherald.com/life/Balzac+mall+pro…
Despite the current economic downturn, the massive CrossIron Mills shopping centre at Balzac is more than 80 per cent leased, with commitments from 15 of 17 anchor tenants, and scheduled to open on time in August this year.
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Well….this could get interesting.
Opening a new mall in the midst of a recession.
Even if it succeeds, it will likely set in motion the demise of other businesses, as it appears there simply isn't enough business to go around.
August 18th, 2009 at 1:57 pm
Anonymous: I agree. It sounds like a nice anecdote, but it's missing, what do you call it…veracity.
August 18th, 2009 at 1:55 pm
back in calgary I noticed the bow construction has made a lot of progess in this last three weeks. For the last year it was going very slowly almost stalled at one point. Now they are making good progress. It left me wondering how they are going to fill that monstrous building if it ends up being as big as originally planned. I think we are going to see a big glut in Calgary commercial space if we already are not seeing this right now.
August 18th, 2009 at 1:08 pm
From Chipman's site:
Híppos Purrós { 08.18.09 at 11:29 am }
Meanwhile – back in Bill Gates country – today’s most interesting piece, courtesy the NYT… (a 4 min video)
http://tinyurl.com/l4e7cj
August 18th, 2009 at 12:37 pm
100 euro in Receivables on your balance sheet — that's an asset, unless/until it goes bad.
So the butcher/etc, were not in debt.
August 18th, 2009 at 12:00 pm
NO -LYMPICS: If you and Garth don't see the obvious in that story (everyone had 100 euro credit and 100 euro debt) then it's time to read a few economic books!
August 18th, 2009 at 11:57 am
Cracked Houses: What the Boom Built
http://online.wsj.com/article/SB10001424052970203…
At the height of the boom in 2005, more than two million houses were built in the U.S., according to the National Association of Home Builders, a trade group. Criterium Engineers, a national building-inspection firm, estimates that 17% of newly constructed houses built in 2006 had at least two significant defects, up from 15% in 2003.
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In April 2008, John D. Reynen, co-owner of the firm, filed for personal bankruptcy protection, saying he owed creditors nearly $1 billion. Months later, his partner, Christo Bardis, also filed for personal bankruptcy. The partners had personally guaranteed hundreds of millions in bank loans to buy thousands of acres of land for development from Bakersfield, Calif., to Reno, Nev. None of the business entities of Reynen & Bardis is bankrupt, says a spokeswoman.
Even Rancho Murieta residents whose homes are OK say they are being affected. Michael Yager, 61, a retired real-estate agent and firefighter, says his bank would not refinance his mortgage unless he paid for a $7,000 engineering study certifying the house is structurally sound. Mr. Yager’s home was built later with a different type of foundation and hasn’t had problems.
“It’s given the whole community a bad name,” he says.
Mr. Lynn, a retired bank executive, says losing money on a defective house was worse than losing retirement money in the stock market.
“The one thing that won’t get better is this house, which will always have foundation problems,” he says. “It has driven me from retirement to doing part-time work at the golf course, and I thought I was financially stable for the rest of my life.”
===
Another story to corroborate the "Buyer Beware" re: anything built duing a boom cycle.
August 18th, 2009 at 11:54 am
Pope, I've concluded that I know nothing about what the future value of real estate will be. I've been wrong way more than I've been right. I'm still not buying a damn thing though. I wish I did know the answer to your question. If I did, I'd be out there going either long or short on something.
August 18th, 2009 at 11:34 am
Suncore energy an Alberta based oil company's performance is UP,Potash corporation of saska's performance is up,Rimm Ontario is up,Mosiac is up,Real estate listings in Vancouver are down and Prices are up.
August 18th, 2009 at 11:17 am
Forgot to mention that it would be a great new thread once we finish the commercial RE discussion.
thx again
August 18th, 2009 at 11:15 am
Pope
I don't know how to post but if you look at my comment 129 on Friday free for all it's excellent reading … WSJ report
P.S. commercial RE is all about CF and leverage … the unwind is just a LOT slower for assets like commercial RE b/c of factors like leases and illiquidity.
Thanks for all your work
August 18th, 2009 at 10:55 am
From Garth's blog:
This is so true.
It is the month of August, on the shores of the Black Sea . It is
raining, and the little town looks totally deserted. It is tough
times, everybody is in debt, and everybody lives on credit.
Suddenly, a rich tourist comes to town. He enters the only hotel,
lays a 100 Euro note on the reception counter, and goes to inspect
the rooms upstairs in order to pick one.
The hotel proprietor takes the 100 Euro note and runs to pay his
debt to the butcher.
The Butcher takes the 100 Euro note, and runs to pay his debt to
the pig farmer.
The pig farmer takes the 100 Euro note, and runs to pay his debt to
the supplier of his feed and fuel.
The supplier of feed and fuel takes the 100 Euro note and runs to
pay his debt to the town prostitute who, in these hard times, gave
her service on credit.
The hooker runs to the hotel and, pays off her debt with the 100
Euro note to the hotel proprietor to pay for the rooms that she
rented when she brought her clients there.
The hotel proprietor then lays the 100 Euro note back on the
counter so that the rich tourist will not suspect anything.
At that moment, the rich tourist comes down after inspecting the
rooms, and takes his 100 Euro note after saying that he did not
like any of the rooms, and leaves town.
No one earned anything.
However, the whole town is now without debt, and looks to the
future with a lot of optimism.
And that, ladies and gentlemen, is how the Western world is doing
business today.
August 18th, 2009 at 10:50 am
realpaul:
Are you saying that commercial sector did its due diligence and simply had bad luck ?
It seems they got caught up in the same fiscal euphoria as the residential market. The residential market and its developers , even if it is being subsidized by higher powers with low interest rates is still taking a risk there are enough greater fools.
Why would their lenders treat the commercial sector differently ? It wouldn't be consistent with the view the economy is booming if they did. There is lots of commercial space sitting vacant and morseo in the newest developments. How could a bank lend to a commercial developer when the final product sits empty for months ?
August 18th, 2009 at 10:20 am
but but the recession is OVER!
http://www.marketwatch.com/story/recovery-begins-…
August 18th, 2009 at 10:12 am
I can understand homeowners putting some intangible mysterious "value" on home ownership. Kids in the yard, etc. But I'm surprised commercial real estate has gotten so out of touch with fundamentals.
August 18th, 2009 at 10:05 am
BTW Garths comment today is right on the money.
http://www.greaterfool.ca/
August 18th, 2009 at 9:37 am
The gap is very wide between the incredulous commercial 'smart money ' guys and the slathering 'dumb money' crowd that drives the residential market. Professionally it is impossible to avoid the obvious conclusions that all is not good in real estate land because the decision making process is based on facts and not hype. The residential crowd however is all hype no fundamentals and hence the antipodal opinions on investment.
Fundamentally, what is happening in the residential market should not be happening but is because of irrresponsible lending practices and an unconsionable media. Business doesn't operate that way, the commercials have to think about the consequences of their actions, they are playing with real money.
Commercial real estate is based on expansion and profitability. What we are seeing with the implosion of the commercial industry is the very dark reality of the economy that cannot be fluffed up by advertising and hopefilled speaches. There are no green shoots in the P&L statements of CDN industry ergo no profits for expansion and no services growing to support the needed infrastructure.
Summation: The newspapers and general media are reporting what is essentially lies about the true state of the economy. Look no further than the barometer of healthy business activity to forecast the near term viability of the economy.