The Commercial Real Estate Market is headed over a cliff and it will drag another industry over with it!

Image by Thomas Hawk via Flickr

If you think that the housing crisis in the United States is over, you're not paying attention. The inventory of unsold houses is over 1.5 million. Over 40% of home owners will be "under water" by 2011 (meaning their mortgage will be more than the value of their home)

If you think investing in Commercial Real Estate in the form of a REIT (Real Estate Investment Trust) is still a good investment, once again, you are not paying attention. This is the market that could and, most likely will, spark a stock market crash in 2010 (Maybe sooner). Here's why!

Commercial buildings, office buildings, Malls and the like, are the lifeblood of the REIT market. Even before the advent of REITs, investing in commercial real estate brought investors and speculators fortunes. Mostly those investors were already rich or well to do because the average retail investor could not afford to be in this market. REIT's changed all that as they began to trade on the markets much like stocks. During the great depression, a number of distraught investors actually jumped from the same buildings they had invested in. Hopefully that won't happen next year, at least, not to you.

If you are invested in a REIT or similar commercial real estate company, there are some things you need to understand, and you need that information now, before things start to unravel even more than they did earlier this year. Yes, I know that, many pundits are very bullish on this market but as Warren Buffett has put it, "you pay a high price for a cheery consensus".

Now, don't take just my word, or anyone's word for it. Look around you! The last time you went to a mall, how many stores were closed, or closing? Indeed, how many malls are still surviving? Over 200 malls in the United States were abandoned this year alone. Now think back to the last few times you went into an office tower in your city for an appointment. Did you notice a number of empty offices or companies vacating the premises? As these properties financing comes due, where are they going to find new financing?

The banks have had a good run this summer. I know. I just sold much of my bank stock today. (when you have a good run you should not fall in love with the stock you own, even if it is a bank with strong earnings. In this case, TD). Banks, particularly those in the U.S., would be the "second" domino to fall if the commercial real estate crashes. It could even be a "death blow" for some banks as their exposure is over $2 Trillion dollars to the sector which could lose as much as $1 Trillion in value.

REITs trying to re-finance properties this fall and early next year, will run into a wall. No one will want to lend them the billions required to re-finance their operations, especially banks that have been propped up by government bailouts. This does not include the 80 banks that have failed this year, or the 200-500 expected to fail in the next 12 months. Yes, that many, and those are the conservative estimates. Some analysts believe the number is closer to 1,000. Even after all that has happened over the last 18 months, the banks are still holding their cash close. However, if your REIT has solid management, is flush with cash and is keeping their powder dry waiting for the downturn, you might wish to hold on to your shares. Only the strong will feast on the many carcasses that will be strewn across the landscape.

Trust has left this market place. It will leave behind it's offspring, pain and loss!

Update: Sept 10th 2009 from New York Times.
Corus Bancshares - First domino to fall.

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From Piggy Bank to Albatross - housing Market will get worse by 2011

Image by Getty Images via Daylife

Housing! It was a great store of value. The largest investment for most average worker or small business owner, in their lifetime. An investment that was guaranteed to increase in value and many staked their futures on the simple premise that "they are not making any more land". House values climbed.

Over the past 40 years, whole neighborhoods were built almost over night in suburbs from California to Florida across the south and Midwest. Houses got bigger, more extravagant and much more expensive. From the 1970's through 2006, investors small and large either built or bought up surplus houses as stores of value. To a lesser extent, it occurred in Canada as well from Ontario to BC. For many boomers, it was their "piggy bank" where one could go, year after year, and re-mortgage to obtain more and more goods, cars, computers, college tuition, you name it. Some made fortunes in real estate. Those days are gone and they are not coming back any time soon. Almost no one expected such a spectacular housing crash.

Deutsche Bank reported Wednesday that the number of U.S. homeowners who's mortgages will be more than the value of their homes, will double to 48% in 2011 from 26% in March this year. The number of homes is a staggering 25 million!

If you bought a house in the past 4 years, it was equivalent to settling down on the beach when the tide is out. When the tide came in, these homes (read mortgages) were under water. So much for the piggy bank. It has been smashed to smithereens by the gluttons of wall street who have, for the most part, been saved by your tax dollars.

"Homeowners with the riskiest mortgages taken out during the housing boom have seen the greatest erosion in equity, in part because they were "affordability products" originated at the housing peak", Deutsche said. "They include sub prime loans, of which 69 percent will be underwater in 2011, up from 50 percent in March".

This also from the Bank: "Regions suffering the worst negative equity are areas in California, Florida, Arizona, Nevada, Ohio, Michigan, Illinois, Wisconsin, Massachusetts and West Virginia". "Las Vegas and parts of Florida and California will see 90 percent or more of their loans underwater by 2011", it added. This is in direct contrast to some of the more hopeful opinions coming out in the past few weeks but those are mostly from the housing industry trying to put some lipstick on this pig. Deutsche Bank hasn't pulled any punches in it's analysis. It is a complete knock out blow to many homeowners. There is one group, however, who stand to benefit from this catastrophe. It is generation Y.

in 2007, my son and his wife were planning their wedding for Sept 2008 and asked me what my opinion was for buying a home. I told them that they should wait until "at least" 2010 or 2011 before they should even start to look. I felt at that time, and I told them, that housing prices would come down from 30-50%, maybe more. They were astounded at this advice as they, like so many others, were of the opinion that you should get into the housing market as soon as possible as housing prices (they assumed) never fell. They argued that, if they wait, it will cost that much more to get into the market and they will have to save up a greater down payment. I asked them if "If you could reduce the cost of purchasing by 30-50%, isn't that a great down payment on your house? This generation is in the housing market drivers seat, and most don't even know it.

I am glad they took my advice, even though I wish I was wrong. The days of storing value in your home are gone for the foreseeable future. Housing, instead of being an investment, has been brought back to where it originated. It is simply shelter! If you or your children are going to invest in a house in the near future, then shop, shop, shop! shop for location (always the most important issue) shop for value, shop for price and shop for mortgage rates. Above all, don't expect any quick return. It may take 10 years to see stored value in any home bought this year.

Remember, "Look after the pennies, and the dollars will look after themselves"!

Jan 23/2010: New York Times-Underwater but will they leave the pool?

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