The Golden Truth: Commercial Real Estate is Collapsing: Will The Fed Bail It Out?

Monday, August 10, 2009

Commercial Real Estate is Collapsing: Will The Fed Bail It Out?

As our economy braces for round two of the residential real estate collapse (see earlier posts for data), the commercial real estate market is in full blown collapse. Formerly high-flying Maguire Properties is the latest REIT to hit the wall, as it just announced that it is turning seven buildings with over $1 billion in debt over to its creditors:

I Would Bet Maguire Is Completely Insolvent

As businesses close down, they are no longer able to pay their leases and tenants that remain are negotiating greatly reduced lease terms. The problem is, just like with the housing bubble, commercial real estate became catastrophically overbuilt and overvalued. As the underlying economics collapse (i.e. tenant cash flow) so too does the value of the properties. You can see what's happening with vacancy rates in the biggest cities from this graph from an article in today's Wall Street Journal:

It will be interesting to see if the Fed addresses this situation when they release their policy statement from this week's FOMC meeting Wednesday afternoon. We already know that Bernanke has included Commercial Mortgage Backed Securities as part of his buy-worthless-assets-with-taxpayer-money program. But will the Fed become even more proactive in attempting to support the unsupportable other than with printed money?

The commercial real estate mortgage market is over $3 trillion (this included multifamily apartment buildings). What makes this catastrophe worse is that we have no idea of the total size of the derivatives which are attached to this debt. There is just no possible way that lending "stress tests" incorporated the above vacancy rates when most of the current commercial mortgage paper was underwritten.

The banks are soon going to facing the second wave of residential housing defaults AND a tsunami in commercial real estate defaults. Rest assured the the stock market and the U.S. dollar will not fare well in this next storm. We suggest moving a healthy portion into the only port with a 5000 year track record of survival - gold.

3 comments:

EconomicDisconnectMonday, 10 August, 2009
In answer to your question, yes the FED will backstop CRE, what else can they do? I think you are so right about the magnitude of this coming bailout, perhaps this is why the bond sales are doing poorly? Add to this, people were pretty mad about bailing out mortgage hilders, but at least that is a person; nobody is going to want to bailout huge REIT and other holders of this stuff.

On a metal note, I was going to write about this catch tonight, but China is offerring silver bullion to the public now for personal investment:
http://prudentinvestor.blogspot.com/2009/08/chinas-silver-bulls-are-on-loose.html

We are in trouble if this sort of thing catches on. Great site by the way.
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Dave in DenverTuesday, 11 August, 2009
thanks for the feedback GYC. I saw that China/silver thing yesterday morning and thought about doing a blog post about it.

Interestingly, starting with gold about 18 mos-2 yrs ago, the Chinese Government has put in programs to encourage the population to accumulate gold and now silver. It fits in with my theory on how China plans on clawing back the wealth it loses when the dollar collases...
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[Mis]InheritanceTuesday, 11 August, 2009
Of course the FED will hold CRE. It will be very interesting how they are going to explain that bailout!

The Journal also reported that JP Morgan is putting up 23 properties. One of which is this behemoth in NYC. One Chase Manhattan plaza, which is right across the street from the NY FED.
http://www.flickr.com/photos/epicharmus/2147720406/
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Why Gold?

Gold is the world's oldest currency. You exchange your fiat currency (dollars, euros, yen, yuan) into gold as an insurance policy against catastrophic Central Bank and Government policies which serve to destroy the value of fiat currencies and destroy democracy.

Gold can ONLY be considered an investment to the extent that it remains significantly and historically undervalued in relation to the fiat currencies against which its value is measured. Otherwise it remains the world's oldest currency and is completely free from the counterparty risk associated with currency by Government fiat (i.e. fiat currencies rely on a Government's "full faith and credit.")

Quote Of The Month Courtesy of "Jesse"

Unfortunately for Larry Summers, Ben Bernanke, and their friends at the BIS, they have not yet figured out how to print physical gold, silver, and other essential commodities, and the world is reaching the point where it might simply start ignoring the New York based markets with respect to essential commodities such as basic materials, oil, foodstuffs, and the like, as they become increasingly irrelevant, fraudulent, and Orwellian. And then where will the financial engineers be, except with no more excuses and no place to hide?

Here is the link to his entire commentary, well worth a read:

http://jessescrossroadscafe.blogspot.com/2010/07/gold-daily-chart-shock-and-awe-for.html

Great Quote From Jim Rogers On Govt CPI Reporting

JR: I mean, we have inflation now. If you go to the shop, whether it’s groceries, or education or insurance or health care, prices are going up for everything. The government lies about it in the US. Some countries lie, many countries don’t: Australia, China, India and Norway. Many countries don’t lie about it and acknowledge that we have inflation. Others lie about it, the UK and the US, but if you go shopping you know prices are up.

Q: Are you saying that the American Consumer Price Index (CPI) published by the US Bureau of Labor Statistics is a lie?

JR: In my opinion, yes, of course it is. Have you looked at it? They’ve changed their accounting several times in the past few decades. When housing was 20% to 25% of the CPI and housing was going up, they didn’t count it, saying rents weren’t going up, and then when home prices started going down, they counted it. It’s the same with many things. It’s staggering some of the tortuous reasoning that the BLS has used over the past 25 or 30 years. When the price of gasoline goes up, they say it’s not really going up because it’s better gasoline, better quality, therefore you’re getting more for your money. I mean, it’s endless, the stuff that they say and for some reason people sit there, although more and more people are catching on, and accept what the government says.

source: www.clusterstock.com

Quote of the Week

"The primary function of a Central Bank is to engage in the massive transfer of wealth from the middle class to the wealthy elite. The Federal Reserve was set up to do this with the blessing and support of Congress." - Dave in Denver

If you refuse to believe the above, please read "The Creature From Jekyll Island: A Second Look at the Federal Reserve" by G. Edward Griffin and then explain to me why the Senate voted down the Vitter Amendment and Congress refuses to pass a law requiring a full audit of the Fed, even though the Fed is using taxpayer-backed money to bailout Wall Street and Europe.