The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

09 July 2009

Next Shock Coming: Commercial Real Estate

Include me as a big fan of Simon Johnson's analyses. The Op/Ed essay below is from today's edition of the Washington Post.
-- David M Gordon / The Deipnosophist
Next Shock Coming: Commercial Real Estate

The Joint Economic Committee holds a hearing this morning on worsening conditions in commercial real estate – falling rents, fewer tenants, and defaults on debt down the road. This seems to be the first hearing on Capitol Hill to focus on these issues and what can be done. “Not much” seems to be the reasonable answer.

The written testimony from Jon Greenlee, of the Federal Reserve, is particularly disheartening. There is currently about $3.5 trillion of debt associated with commercial real estate, about half of which is on the books of banks. He suggests that the Fed has been following this situation closely and has stayed on top of banks’ exposures to the sector. He also has some rhetoric about the recent stress tests. Why do I
not find this reassuring?

James Helsel, on behalf of the National Association of Realtors, is even more negative. He argues that this sector supports 9 million jobs and many of these are now in jeopardy. Of course, he is looking for a bailout of some kind (who isn’t?) but still he is right about emerging problems in and around the retail sector.

Jeffrey DeBoer, of the Real Estate Roundtable, has a similar line – as he sees the numbers, commercial real estate is 13 percent of the economy and it’s in trouble because there is not enough credit to go around. He wants – of course – more cheap government credit for this sector; and he has an extensive blueprint/Christmas list of items.

I’m not convinced by the economic merits of their bailout cases, but it’s good to have these lobbyists making their case out in the open – this is a refreshing change from the banking sector, which prefers to work behind closed doors.

Across all these sectors, it’s amazing to see such free market (and even some libertarian) interests come together and – with one voice – clamor for government subsidies.

The Federal Reserve, of course, is already supporting a large part of the credit market. It would not be a surprise if it moves more of this support toward commercial real estate over time, but it’s hard to see how we can afford to risk the kinds of measures Mr. DeBoer proposes at this stage.

The underlying problem here is that consumers and businesses are spending less – mostly because they feel the need to be more careful and to increase their savings. Until private-sector spending finds a sustainable level, measures to directly support commercial real estate are likely to have little impact.

There will be defaults and debt restructurings. This is an unavoidable part of our current slowdown, but watch out for the further damage to banks’ balance sheets that lies ahead.
-- Simon Johnson

NOTE: Testimony can be found on
the committee's Web site.

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