Commercial Property Herald

On The Other Hand

What will the effect of the recent Wall Street tumble have on our economy? Should it have any effect at all?

These are two of the questions that I have been asking myself since the 2008 crash and within the last few days.

A recent article in the Sacramento Bee, Wall Street aftershocks felt in California's economy, got me thinking again.  Yes, Mike, thinking again is a good thing, particularly at our age.

Wall Street, generally overreacts and instantly.  There is no time laps or lag here.  As the president speaks, the market either goes up or down before he walks off the podium.  Yes, I agree it is often a heard mentality and it is about as reliable a guage of success or failure of a policy as a bet in Las Vegas.  I find the market gyrations interesting and sometimes disconcerting, but not something to get elated or depressed about.

On the other hand, if there were some underlying facts that I should consider that may have effected the market, I will.  Over the last week or so, it is clear that the debt ceiling debate, our governments falure to stop playing politics and deal with the problem and now the downgrading of the US debt has had considerable effect on Wall Street.

On the otherhand, we all should have seen these problems coming on, particularly the downgrading of the US debt.

On the other hand, there are those who would argue that the downgrading of the US debt by S & P is nothing more than an opinion of the wealthy few who think they know what they are talking about.

On the other hand, S & P knew what it was doing when it rated all that CMBS debt and housing debt, didn't they?

On the other hand, maybe S & P should have acted sooner because our economy may not be doing as well as our politicians have been telling us, or at least it doesn't feel like it is doing as well.  Maybe there are some sound economic principles and markers behind the downgrade and the market should be reacting to these economic principales and markers.

On the other hand, maybe I just have no clue and have no idea what I am writing about.

On the other hand, maybe the stock market is right where it should be.

Is There Gold in Thar Hills?

I noticed this "ar" aticle  (and no Mike, I did msipell this intentionally), in the Orange County Register about the expansion of Gold Max, a growing retail chain in the business of buying and selling gold.  It seems like a rapidly expanding business with very strong short term prospects, with unemployment and gold as high as they are and the economy as low as it is.

I suspect gold will continue at its lofty hieghts for some time while the economy continues to struggle and people need to dispose of the shrinking family jewels, (no I don't do divorce law) for cash and those with cash are looking for places to put it with, again, an unstable stock market.

But how long will the gold boom last and how long will it be before Gold Max starts seeking additional rent concessions partly caused by their rapid expansion.  I suspect that in about 3-5 years, this business will start having trouble as the economy and employment improve and the gold business start diminishing.  In the meantime, you might as well go for the ride, since it looks like it will be a fun one for the gold people.  And that is ok for today's landlords since by the time that the Gold Max starts having trouble, there will be other tenants to replace them.

 

How will Medicare Cuts to Long Term Nursing Facilities Affect Commercial Real Estate

As a follow up to my most recent conversations on how the debt ceiling crisis will affect commercial real estate, Reuters reports that the federal government just announced deep cuts on medicare & medicaid reimbursements to skilled nursing facilities.

So in answer to my previous question, yes, this is going to hit commercial real estate, right square in our real estate pockets and seriously puts into question my soothsaying credibility since I have been so positive on investing in skilled nursing facilities and properties as a long term investment.
Of more importance is, " How will these cuts affect the long term care of the elderly and the ability of their children to care for them?"

I think the short answer is:

• Long Term Medical Care Facilities Revenue will drop;
• There will be less investment in Long Term Medical Care Facilities;
• Less Facilities will be available to take care of our elderly and Baby Boomers who are rapidly becoming elderly, (myself included); and/or
• The quality of care will devolve; and/or
• A greater cost of care will assumed by our children; or
• Soylent Green

Retail Market Sees Little Change in 2nd Quarter. Where is it Going?

OK, I will admit I am a bit stumped.  As I had predicted almost 3 1/2 years ago when I started evicted furniture stores, mortgage companies and realtors from retail and office, the commercial real estate market was going to take a dive.  While it took a dive, it didn't dive as much as I thought because there were still plenty of mom & pops out there who still wanted to open their own retail business and plenty of foreign money.  While vacancies increased, prices didn't go down as fast and as sharply as I thought, although the credit worthiness of the tenants and the landlord's due diligence became almost non-existent.  Landlord's due diligence is a post for another day for me to write about.

Then it seemed that while the foreclosures increased and the prices of the retail properties came down, the money waiting in the wings came back in, proping up the market and the retail markets.

I have seen a over the last year, an increase in sales activity while the bottom dwellers get back into the market, which may also cause a further reduction in rents but I am not sure I can clearly see where the market is going.  

It seems to me that, as Roger Showley of the San Diego Union Tribune, writes,  the market is not only flat, but probably will remain somewhat flat for the foreseeable future, with some slight gains and dips over the next twelve months.  It just seems that there is just too much uncertainty in the market for anybody to jump back into the market with ferver, including foreign investors.

How will the Debt Ceiling Debate Effect Commercial Real Estate

With all the hullabaloo and politcal rangling over the issue of raising the United State's debt ceiling over the last few weeks, I have been contemplating how those in commercial real estate will be effected. On July 29th, Globe Street Reports that Goldman Sachs and Citigroup have pulled a 1.5 Billion CMBS offering this week., has partly answered my question.  Higher interest rates, less availability of money and perhaps a slow down of the recent uptick in the commercial sales that we have been seeing lately.  Over the next few posts, I will be setting out some of my thoughts and the thoughts of others on this issue.

Are Discount Retailers Making Good Lease Deals in Today's Market and What Will Happen When the Economy Improves?

When the recession/depression started a few years back, I predicted that there would be a significant increase in business for discount retailers and club stores such as Costco and 99 Cent Stores.  Really didn't take a genius to figure that out.  As many of us already know that over the last few years, Dollar Tree and 99 Cent Stores now have access to shopping centers that would not have considered them years earlier.  My question is, how long are these leases and what will happen when the economy improve?

For the discounters picking up leases in more desirable locations and centers in today's market, my assumption is that they are signing leases at a highly discounted lease rate and a long enough term to secure the location for the foreseable future, (10 years or more).  Certainly, as the retailer, I would be locking in today's rate for as long as I could and if the market changed such that the store no longer generated the desirable revenue, you could always turn it back to the landlord, or, if adequatly negotiated, sublease or assign it.  In today's market, it is a no-lose situation for these retailers.  It's a lot like doubling down when your dealt a 5 & 6 and the dealer is showing a 6!

Why Close the Bank, Just Bail it Out.

Carrie Bay writes in DS News Regulators Shut Down Four Banks, about the recent spate of closures by the FDIC of community banks including shutting down La Jolla Bank FSB. According to Carrie:

"The FDIC brokered a deal with OneWest Bank in Pasadena to take over La Jolla Bank’s $2.8 billion in deposits and reopen its ten branches. One West, which was formed to take over IndyMac Bank when it collapsed, also agreed to purchase “essentially all” of the La Jolla Bank’s $3.6 billion in assets, $3.3 billion of which the FDIC agreed to share losses on. The California bank’s failure is expected to cost the FDIC $882.3 million."

This deal follows on the heels of questions raised about the deal brokered by the FDIC when One West Bank took over Indy Mac Bank and One West Banks most recent profit disclosures.

All of this raises the question, what would happen if the FDIC didn't close the community banks holding the toxic loans and instead, simply shared the losses with the failing banks?  What if, in the case of La Jolla Bank, the FDIC just agreed to share the losses with the bank, expecting to lose $882.3 million?

How Far Down will Commercial Real Estate Continue to Go

Ariel Fisher, a co-member of the Corporate Real Estate Group on Linkedin asked the question:

"How close is the real estate industry to hitting "bottom?" And what do you think is the number one sign that we've reached that point and are on our way to a real recovery?

A Colleague of mine recently wrote a blog post on the state of the real estate industry. He believes that the "bottom" is in sight and that we are on our way to a real recovery.

He cites private REITs recently going public and Tishman Speyer handing Stuyvesant Town back to the lender in lieu of bankruptcy, with several creditor/buyers trying to snap it up at a bargain price, as just two examples that the "bottom" is near.
(Click: http://blog.buildingengines.com/?p=423 to read the full article, including other examples of an impending "bottom.")

Once we see employment rates increasing, he argued, we will know real estate recovery is on the way. What do you believe is the number on sign to look for that things are on the up-and-up?"

I answered as follows:

Commercial real estate still has a way to go before it bottoms out and I think that we are only still in the early stages of the problem. Probably about 1 1/2 to 2 more years before it bottoms out. The fact that there is still money out there to spend on real estate only means that there are potential bottom dweller buyers, including REITS looking to snatch up the deals, which I believe there will be plenty of. This is what the REITS did in the mid to late 90's.

The more interesting questions is how will the continuing fall of commercial real estate effect the economy? In answer to that question, I answer, "some," but not as much as the collapse of the residential market. I see the economy more likely to continue to effect commercial real estate then the other way around. As long as unemployment continues to remain high and less money is available from a large pool of consumers there will continue to be commercial real estate failures and bank or lender failures and maybe some REIT failures.

To make my answer even more verbose, with the current backlash over government spending, the federal deficit and the effectiveness over prior and existing bailout plans, I have serious doubts that the government is about to bail out commercial real estate investors, anytime soon. The most likely scenario that I see is that commercial property owners will continue to fail, causing banks to continue to fail, which the FDIC will have other banks take over who will pick over the good assets of the failed bank and leave the rest to the FDIC, who will then sell the bad assets at a highly discounted rate. When that process begins to slow down is when you will see signs of the real estate industry hitting bottom.

For other interesting discussions and information on commercial real estate, visit the Corporate Real Estate Group of LInkedin, which can be found at http://www.linkedin.com/groupAnswers?viewQuestionAndAnswers=&discussionID=13118264&gid=35901&trk=EML_anet_qa_ttle-d7hOon0JumNFomgJt7dBpSBA

Frank Suggests Tarp Funds To Be Used for Unemployed Mortgage Payments

Representative Barney Frank is now suggesting that Tarp funds be used to pay the mortgages of unemployed workers Congressman Calls for Bailout Money To Go to Unemployed Workers.  Now this is an idea that I might actually get behind as long as the government can assure that the funds are used to pay the mortgages.  In this way, we are not just giving money to the bank's executive's bonuses and are actually doing something to help the unemployed.  Might actually slowdown the foreclosures and prop up property values.  Sounds good so long as you believe the government can get this done and actually control the fraud and abuse.

The Future is Skilled Nursing & Assisted Living Facilities

LTC Properties, a self-administered real estate investment trust recently announced its results from operations for the nine months ending September 30, 2009, LTC Announces Third Quarter Operating Results.  It not only made money, but it repaid debt secured by an assisted living facility.

I am only too familiar with the growing need for assisted and skilled nursing facilities in the United States, since I am responsible for my mother's care who has Alzheimer's.  There is a growing, aging, baby boomer population that will be living longer.  I look for investments where there is a need.

While there is and will be a growing need for assisted living and skilled nursing facilities, investing in the operations of these facilities are at an unusual and particular risk that concerns me.  While there is considerable room for profit, there is a peculiar risk of total collapse. There are many and significant regulations that operators must adhere to, with little room for mistake. Any allegation of negligence or abuse at the facility, whether true or not, could bring the whole house of cards down, not just at the facility, but for the whole company.

On the other hand, investing in the properties and facilities for these operators seems to me to be a far better bet.  The real estate investment vehicles should be able to insulate themselves from the liability that the operators are exposed while having the flexibility of providing facilities to different operators. 

Investing in long-term care and other health care related facilities through mortgage loans,facility lease transactions and other investments may  be a more conservative but likely profitable approach to senior living that I could get into.