Strike Three - the Coming Retail Real Estate Bubble
We are all living through the Residential Real Estate Meltdown *** that's Strike One *** Speculation and criminally easy credit built the Bubble and now we watch its sloooow motion bursting in the real estate sales and price numbers daily As if that wasn't bad enough, the Lenders and Wall Street firms created a Smoke and Mirrors Ponzi Scheme out of what used to pass as responsible Lending Practices and you get *** Strike Two *** - the nastiest Credit Crunch in a very long timeWe are all living through the Residential Real Estate Meltdown
*** that's Strike One ***
Speculation and criminally easy credit built the Bubble and now we watch its sloooow motion bursting in the real estate sales and price numbers daily.
As if that wasn't bad enough, the Lenders and Wall Street firms created a Smoke and Mirrors Ponzi Scheme out of what used to pass as responsible Lending Practices and you get
*** Strike Two ***
- the nastiest Credit Crunch in a very long time.
Here are a couple symptoms:
Tuesday CitiGroup announced a loss of $9.8 Billion and a bail out by money from Kuwait and Singapore.
They reported revenue of $7.2 billion for the quarter, down 70 percent from $23.8 billion a year earlier. That is a $16 BILLION dollar drop for the quarter alone ... and no one expects this to be the end. No wonder no one wants to lend anyone new money ... they aren't sure how much they really have!
Ready or not here comes *** Strike Three ***
The Bursting of the Retail Bubble
Strikes One and Two are tipping us into a Recession AND there has been significant overbuilding of Retail Space in many markets as developers chased the Residential Bubble.
We are set up for a real crash in Retail Properties.
This week bought three signs of the impending collapse:
1) Massive Retail Overbuilding:
In the average market Retail Space Under Construction accounts for just 3.3% of the existing stock of Retail Property.
Here are the percentages of Retail under construction in several cities as reported in the WSJ this week.
San Antonio - 11.6%
Inland Empire, CA - 8.7%
Phoenix - 7.2%
Cleveland - 6.5%
Las Vegas - 6.3%
2) Big Boys go Belly Up
Centro Properties is an Australian company and owns 674 Shopping Centers in the US. This week they announced that the entire company is for sale.
They financed a recent acquisition spree with $3.4 Billion in short term debt and are now unable to refinance as a result of the Credit Crunch.
3) Recession's Effect on Retail
Retail Profitability is uniquely tied to the health of the overall economy and Consumer Spending. It also tracks the Residential Markets most closely of all Commercial Property Types.
With the triple play of
- Residential Collapse
A Collapse of Profitability in Retail is just over the horizon.
I would say "Watch Out" if you are in any stages of purchase or development of Retail Property.
Strike three is coming at you ... Don't swing at that pitch.
Now we all know that "All Real Estate is Local" ... and you may be in a local market where you will do just fine ... AND I advise you to carefully check the state of the larger market where you reside for signs of future weakness.
These same Market Forces do not bode well for Office Properties....
Which brings us to Multifamily...
All of these same factors play to the advantage of Multifamily Investments.
- A pool of new renters as foreclosures skyrocket
- A need for affordable housing as the economy sinks
- A shrunken pool of apartments available due to condo conversions over the last few years
- Many areas experiencing very low Apartment Construction starts
- strong rental growth projections
These forces are moving so strongly in favor of Multifamily that I am almost exclusively focused on this Asset Type for the foreseeable future.
A quick Credit Crunch "Man on the Streets" report.
Starting right now, you will want to adjust your acquisition proformas to get no more than 75% LTV in debt financing on your purchased properties in 2008. You might be able to get up to 80% ... just don't "bank" on it going in. AND build financing contingencies in to your contracts to give you at least 30 days longer to close than you are used to taking in the past.
The old rules of financing Commercial Property Acquisitions have changed. You will have to kick and scratch to finance any purchase in the next six months ... get ready.
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