Sunday, December 16, 2007

Commerical Real Estate the next local shoe to drop

I just finished reading the just released print edition of Bakersfield Life (a monthly magazine from the Bakersfield Californian); I wanted to make a note of some predictions for 2008. There are a couple of predictions for Commercial Real Estate (CRE) that are not on the above website, they are only in the print edition.

These same individuals (one in particular) were predicting, in the summer of 2005, that residential real estate would boom for 5-7 more years. As we all know now, that prediction was 100% dead wrong!

Before we look at their sales pitch, I mean predictions, please read the CRE posts by Calculated Risk and Mish's Blog. These are two excellent blogs that have been predicting that CRE would be the next shoe to drop in 2008.

I believe this will happen locally as the amount of commercial retail space that has been built far exceeds the realistic demand. In the next year several hundred thousand square feet of additional space will come onto the market and depress prices and rents. The weak hands will fold and we will see many players lose their properties to foreclosure. Those properties built in the last few years, on inflated land, will be the most vulnerable. The sales pitches made below will turn out to be false, as were the ones made about residential real estate during the boom time! What amazes me about these predictions, is the total lack of foresight into the CRE bubble. They all acknowledge residential real estate bubble bursting and yet make no connection to CRE, which usually adjusts 1-2 years later.

Bakersfield Life:

Duane Keathley, CB Richard Ellis:

"Looking forward to 2008, the sharp downturn in our residential market will undoubtedly have a cooling effect on the retail sector. Many retailers are anticipating a decline in sales volumes due to pressure on disposable income levels and consumer confidence. Fortunately for Bakersfield, we are not overbuilt as it relates to retail space."

Bruce Freeman, Castle & Cooke:

"2008 will be an extremely difficult year for residential real estate. Fortunately, at Castle & Cooke, we forecast 2008 to be a very strong year for commercial development..."

Kym Moore, Raboank:

"I see 2008 as a continuance of 2007 in the residential real estate market. I don't think the single family housing market has reached bottom...On the bright side, commercial real estate development acvitivity has increased in this area."


Bakersfield Bubble said...


Dec. 17 (Bloomberg) -- Centro Properties Group, an owner of almost 700 U.S. shopping malls, plummeted 69 percent in Sydney trading after cutting its profit forecast as it struggles to refinance debt amid the U.S. subprime mortgage fallout.

Dividends are expected to be 40.6 Australian cents in the year to June 30, 2008, down from 47 cents in a previous forecast, the Melbourne-based company said today in a statement. Centro won't pay a dividend in the first half.

The slump wiped A$3.3 billion ($2.9 billion) off Centro's market value as the company said it may have to sell assets after it was unable to refinance A$1.3 billion of debt. Centro, which owns shopping centers in about 40 U.S. states including the Roosevelt Mall in Philadelphia and Clearwater Mall in Florida, increased its debt to 44.1 percent of assets after adding A$14 billion of American malls in fiscal 2007.

``It shows that companies that are highly geared, no matter how they're structured, are going to struggle as the issues with credit continue,'' said Angus Gluskie, who helps manage the equivalent of $500 million at White Funds Management in Sydney. ``If investors see a company struggling to refinance they don't want anything to do with them.''

Shares of Centro fell A$3.91 to A$1.79 at 12:07 p.m. in Sydney, slicing the company's market value to A$1.5 billion. Centro Retail Group, a unit of the company, declined 59.5 cents, or 42 percent, to 83 cents. They are the two worst performers on the MSCI's 1,960-member World Index.

Funding Avenues `Shut'

The 20-member S&P/ASX200 Property Trust Index fell 7.8 percent, more than three times the decline in the benchmark index. It is the biggest one-day fall in the property index since it began in March 2000.

``We never expected nor could reasonably anticipate that the sources of funding that have historically been available to us and many other companies would shut for business,'' Chairman Brian Healey said in the statement.

Investors, concerned that losses on securities backed by U.S. home loans will escalate, have shunned all but the safest of debt, driving up corporate borrowing costs.

Centro may spend about A$40 million refinancing and restructuring its debt. The company has more than A$5 billion in outstanding bonds and loans, more than half of which fall due in the next three years, according to data compiled by Bloomberg.

Halts Growth Plans

The $3.7 billion takeover of New Plan Excel Realty Trust in April was Centro's sixth U.S. purchase in less than four years, as Chief Executive Officer Andrew Scott transformed the company from an operator of Australian regional centers into an international mall owner.

Centro said new debt refinancing will halt its plans to grow assets in the U.S., which were expected to generate higher earnings.

U.S. malls helped Centro increase operating profit by 14 percent to a record A$335.3 million in the 12 months ended June 30, as rents rose in the world's biggest economy.

Since then, concern has increased that the slump in U.S. housing will curb retail sales and commercial property construction, hurting U.S. shopping mall owners.

The credit quality of Centro NP LLC, a U.S. real estate investment trust managed by Centro Properties, may be cut because new loan terms for its parent may affect outstanding debt, Standard & Poor's said Dec. 13 in an e-mailed statement. Centro NP was formerly New Plan Excel Realty Property Trust. S&P doesn't rate Centro Properties.

Bakersfield Bubble said...

Good timing on this article!

Adam said...

Here's an interesting editorial that ran in the N.Y. Times today, explaining how the credit/liquidity crisis cannot be cured by any Federal action, since it's not a crisis of CONFIDENCE, but a crisis of SOLVENCY:


Bakersfield Bubble said...

Thanks Adam!!

Bakersfield Bubble said...

Hat Tip to Lander:

From the Sacramento Business Journal:
Investors will likely find favorable real estate deals next year -- if sellers are willing to bargain -- in land, apartment complexes and office buildings around Sacramento, according to a market forecast from the region's top brokerage, CB Richard Ellis. The discount is courtesy of the severe housing downturn and the global credit crunch, which have pushed values down for all kinds of non-housing assets.
Land values are plunging, and broker William Ayres expects the same in 2008. So far, owners have been reluctant to deal, holding out hope that their once-skyrocketing values will return as the housing crisis passes. But not all of them will be able to stand pat and will be forced to sell to cover debt on their holdings.
"It is troubling that we have 2.5 million square feet under construction with another 6 million vacant," [office specialist Greg] Levi said of the overall downtown market. "That's an eight- to 10-year supply."
CB Richard Ellis 2008 predictions: Average home prices will drop well below $300,000 before stabilizing.

Bakersfield Bubble said...

A Martinez developer specializing in renovation says he regrets having bought the 60,000-square-foot Hunter Building north of downtown Stockton. ‘The Stockton market is so slow it’s killing me,’ he said. ‘There are no takers in Stockton. We have an empty building.’

‘The building takes up the entire 800 block of North Hunter Street. Sawhney declined to say how much he has invested in the remodeling other than to say ‘a lot.’ He bought the building in early 2006 for nearly $2 million and said early this year that he expected to spend about that much rehabbing the building. ‘I regret it, but now we are into it.’

‘The business condo market is slowing down substantially, said Shelly Cannon-Keely, an office specialist in the Stockton office of commercial real estate broker CB Richard Ellis. She is not involved in marketing the Hunter property.’

‘It has not been as much credit driven as much as it involves real estate worries regarding future value and if it makes sense if they will receive a return on their investments,’ she said.’

Adam said...

[b]‘It has not been as much credit driven as much as it involves real estate worries regarding future value[/b]

Which is a great point to remember:

The value of ANY investment is determined by weighing risk vs reward.

If you can invest in a so-called "sure thing", guaranteed to return 20% annually, then that asset will be worth MORE than a similar asset that will be guaranteed to depreciate 20%.

So the price of real estate'land skyrocketed over the past 7 years, when the perception was that real estate was a 'can't miss' proposition. Prices went over 3x their traditional (baseline) prices, based on a great likeihood of good future gains in values. In a sense, you could make an argument that homes WERE worth more, simply because everyone thought it to be so (remember the bidding wars, where people were driving prices HIGHER?).

But now that the bubble and fantasies of wealth for all has 'burst', the odds of such price movements have dwindled: you can COUNT on prices to erode.

But what of the price? Shouldn't those prices drop off a cliff, since the run-up was based on high hopes of future returns? Damn straight, they should... The easy money that fueled this bubble has been shut off, for good....

But it seems alot of sellers want to pocket 'their' equity (which isn't real, until the property is sold and converted into cash), and many still have that pipe-dream of handing off the white elephant (poor investment) to some unsuspecting bag-holder...

Jeff said...

Duane, Bruce and Kym that you've quoted in your article are truly delusional. How can these people be so incredibly blind and just flat out stupid?

Why are they drawing paychecks when they are so totally out of touch? What value do they bring to the table?

Mind boggling!