Volume Increases - More Problems in Commercial Real Estate

commercial real estate problemsI apologize for no post yesterday, as due to the busyness of the ICSC conference, I was unable to find time to get something up. The conference ended today, so daily posts should be expected once again from here on out. I am glad nothing too significant has taken place this week thus far (aside from the 200+ point rally on Monday) as I haven't had the easiest access to my Zecco.com trading account to make moves. I am now back in business and received some great knowledge and insights from the conference that has reaffirmed my existing thoughts on the economy and the future of the stock market.

There were several professionals at the conference who did not stay the whole duration of the conference, due to costs and a lack of meetings from poor attendance. Many of the companies, cut their attending staff in half or even more. I discuss the conference in much more detail in today's premium podcast (subscribe here) and talk more about Simon Property Group and GGP's influence (or lack thereof) on the conference.

I believe it is very safe to say that problems for commercial real estate are just breaking. Although there has been a slow bleeding in the industry for over a year now, the problems are becoming more severe and are accelerating for commercial real estate owners. Remember, a lot of money had been made in real estate from 2003 to 2007, so many of the companies were decently capitalized and had reserves for some properties in case of some difficulties. However, there were very few who expected problems as severe as we have seen them in this market.

One big trend I found in my conversations at the conference is the lack of activity going on in the business. Most everyone was saying the same thing, which was that now is not the time to buy and that they are waiting for the "distressed" real estate to hit the market as well as the REO properties. This lack of activity in such a large financial market will have big effects on the the overall economy. As a result, banks will not be issuing many loans in commercial real estate, tenants will continue to struggle, and landlord's income will continue to bleed. Eventually, these problems once again are put back on the banks, which is why I have continue to be very bearish with financials.

Another common conversation was the zero existence of financing, especially with the banks. Most deals that are being done are either through seller financing, private equity, or all cash. Even some of the trophy assets that you would think should not be a problem to get financed are having problems with banks. Much of the problem is due to the rapid cap rate compression we saw the past five years, due to the strong compression we saw in interest rates. Now that interest rates have risen from the low 5% to now 7-9%, all in a year, cap rates have not caught up. This is a big reason for the lack of transactions in the market.

With many other reasons, these are just a few of why I continue to be bearish in the real estate market and in financials. Plays like SRS, I feel will be very rewarding when this next turn comes into fruition. However, shorting individual REITS and other real estate companies could prove to be stronger for a longer term investment as to not get hit with decay from the leveraged ETFs. There may be a lag time in these problems fully being exposed in these companies, due to the recent financial help from the government, however, I believe great difficulties and bankruptcies are inevitable for many of these companies.

We have now seen a couple straight days of downward trading following the big rally on Monday. It has been a pretty mellow week in regards to economic data, as only new homes were announced yesterday, and actually proved to be much worse than the market anticipated. I believe we will begin to see us slowly return to earth from this government spending honeymoon the markets have enjoyed the past few months.

Bank of America will be issuing 825 million shares to the public at $10 a piece. The most amazing thing about this is that the stock was up today! That is like going to the store and asking the clerk if you could pay an extra dollar for a stick of gum. The offering is more than 10% below its current price, which is quite of a large gap compared to other offerings we've seen. It is these things that I see in our market that makes me wonder who on earth is in this market right now. Eventually, the stock price should adjust, but good luck to those that are buying it now.

I will be looking to take some positions, possibly tomorrow or Friday, depending on how we see the market move and what the volume is doing. I am very comfortable with our current market position and the opportunities I see ahead of us in the short term. I will be on chat tomorrow so that if you have any other questions from the conference you can ask me then, or post it as a comment. It's good to be back and Happy Trading.

4 comments:

  1. Doug Says:

    http://www.cnbc.com/id/30847981

    credit patrick for posted this article in chat today. the article goes into detail about the commercial RE crisis we are about to face. So, here we have Tilson, a Hedge fund partner, sharing the same opinion as FF. If hedge fund partners are catching on, investors wouldn't be far behind.

  2. Michael Says:

    What are some real estate REITs that you recommend shorting?

    On another note I have tried to short some ETFs like FAS on my Zecco account but am unable to do it. Am I doing something wrong?

  3. Doug Says:

    i personally have SRS. people on the board have shorted URE which is the opposite of SRS basically.

    by "shorting" you are selling shares when you do not have any correct. If Zecco doesn't let you do this, I would call them and ask. Most brokerages are very helpful when you call.

  4. Finance Fanatic Says:

    You usually need to fill out extra paperwork for margin trading and selling stocks naked. Contact Zecco and ask them if you are eligible for margin trading. Or you can buy and sell put options, which does not require margin trading.