Distress: Where does it hurt? Everywhere in Commercial Real Estate!
There are over 1,400 retail properties in distress totaling some $31 billion according to Real Capital Analytics. Retail is the leading distressed property type by almost double the value when compared to every other property type. Even without the General Growth Properties (GGP) bankruptcy, retail still led the distress pack in 1Q 2009 with over $16 billion of properties in distress and the highest number number of properties. Even so, where does it hurt? “Everywhere”, states Real Capital Analytics.
There is more news each and every day, and most of it not good.
- Commercial real estate market threatening economic recovery, say industry leaders…
- One of the shoes that the bears wait to fall is the Commercial Real Estate…
- More than two years into the credit crunch, commercial real estate lenders still see no easy way out…
Yet, we have a “leading” industry publication, Retail Traffic reporting Commercial Real Estate Debt Won’t Be the Next Shoe to Drop …? The commercial real estate debt fear is misplaced?
Huh? What?
Well, the shoe is already dropping and set to drop further. This kind of talk is a genuine disservice to those in and outside of the industry. It is all about jobs, jobs, jobs. Commercial Real Estate 101 goes like this:
Job Creation –> Demand for Office and Industrial space –>
Demand for Housing –> Demand for Retail Space
This is not rocket science, just simply economics. Job losses continue to mount and the political uncertainty is not helping. Small businesses are the greatest job creators of our economy and they are paralyzed due to mounting costs, looming taxation, a health care fiasco, lack of credit and a host of other issues — none of which are being address on any serious level by any branch of government. Until we are able to start creating some serious jobs things are going to get worse, not better in commercial real estate.
And now we have the Capmark bankruptcy to contend with brought on in part by the fact that commercial real estate properties are not worth a sufficient amount to cover or service debt.
Here is a slide from my latest Retail Real Estate Presentation to investors that subjectively shows where we are right now in the Retail Real Estate. My biggest concern is about underestimating where we are in the cycle.
Yet, what does this mean for savvy investors in the future? Perhaps the greatest opportunity in our life time to acquire real estate assets below replacement cost, below net asset value, below ridiculous debt levels, and basically below everything that matters. This will require due diligence and patience. Things are not going to turn around quickly but the buying opportunity over the next several years will be unprecedented for well located, cash flowing properties that have unique qualities and characteristics that stand the test of time. In short, places where people want to be. As we have seen, ridiculous debt levels combined with places that people really don’t want to be — like commodity tract housing and commodity big box retail — have little lasting value. The true value is in the places where people do want to be, now and in the future. Well-conceived and well-located mixed-use projects that offer unique characteristics such as water views, water access, higher education and the like continue to be the places where people DO want to live, work, play and learn. This bodes well for the coasts, and university towns. Now, let’s do some due diligence and seek out those opportunities.
Tags: commercial real estate distress, jobs, mixed use, sense of place, unemployment Posted in
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