Still Here

Another day, another "solution." Yeah, right. What about tomorrow, when the next phase of this slow-motion meltdown unfolds? Or the day after that? Or next week? Or next month? Unfortunately for those who are trying to keep the sinking ship afloat, there isn't enough money available to meet the potentially unlimited demand for band-aids and bailouts. So, many long-festering problems, such as the unraveling of the commercial real estate market, will only worsen. In "Struggling Commercial Real Estate Helplessly Waits Around For The Slaughter Of 2010," Business Insider's The Money Game clues us in on the latest developments:

While many other parts of the U.S. economy are in an apparent uptrend, commercial real estate still faces continued deterioration this year.

According to Fitch ratings, the default rate for commercial real estate loans packaged within mortgage-backed securities hit 8% in Q1 of this year, up from 6.6% in December.

There have now been $31 billion of commercial mortgage-backed securities (CMBS) defaults over the last 39 months.

Shopping centers, apartments, hotels and offices make up the lion's share of struggling properties, and default rates are highest in Texas, Florida, Arizona, and California. The data will get a lot uglier before it gets better:

Reis:

Rising vacancies and falling rents in commercial real estate are squeezing landlords' cash flow. That is making it harder for them -- sometimes impossible -- to pay the mortgage. Compounding the problem: Many struggling owners bought high-priced properties with excessive debt, underwritten on the assumption that buildings would be full and rents would rise.

Commercial real estate analysts suggest that defaults will continue unabated for the foreseeable future. Fitch predicts that the rate will exceed 11% by the end of this year.

While $30 billion dollars has been raised since the beginning of 2009 in order to invest in distressed commercial real estate, and future investor demand should put a floor (hopefully) under the commercial real estate market, these future buyers of distressed real estate could actually lock-in the death of current struggling owners who bought their properties at too high a price:

Opportunistic investors that are able to snatch up distressed real estate for pennies on the dollar, for example, will be able to charge lower rents vs. competitors stuck with heftier debt service.

"That's what always kills you -- the guy who builds it cheaper or buys it cheaper can undercut your rents and take your tenants," said Conklin, who focuses on the real estate and industrial sectors at Baird. "He'll generate the returns he needs, but you won't be able to lower the basis in your building."

Thus even the economic recovery won't necessarily save many owners who simply own properties at uncompetitive cost bases. Old buyers will be culled even if a recovery is in the cards long-term.

Moreover, money on the sidelines is in no hurry:

While some of that REIT capital has gone toward paying down and restructuring debt, companies such as Simon Property Group, ProLogis and Boston Properties are among roughly a dozen that have amassed ample liquidity to aggressively pursue acquisitions, SNL Financial says.

Still, REITs haven't bought much recently. But Pelusi predicted that more distressed assets would come to market in 12 to 18 months, amid a sluggish recovery and lackluster job growth.

"There remains a significant bid-ask gap between existing owners and the potential new owners or lenders," he said. "But deteriorating property fundamentals will make it more difficult for lenders to continue the extend-and-pretend policies, which we believe will create more deals."

Many distressed buyers can see the inevitable slaughter and are just waiting for the worst to play out.

Comments

[roger]

All talk is in economic terms,but the basic reality
is that there is a major breakdown/change in human relations,
trust being the first casualty,exchanges are no longer
based on reasonable fairness,but on losers versus winners,
there are a few big winners,but the majority find themselves
sinking in quicksand with no solid ground insight.

[Tyler Eliott]

The problem is that Governments can truly continue the bailouts with no abatement. They print unlimited money and with the exception of Greece, have shown no backbone to actively protest. Who would have possibly imagined that last night between Europe and the IMF, they'd have structured a $750billion bailout for Greece and other PIIGS who will need such assistance in the near future. 1/3 of that money - $250billion came from the IMF i.e. American taxpayers and we're all clueless to that fact. In addition to commercial real estate, it was recently announced that Freddie Mac needs another $8.3 billion and there will be a point when the US Govt. bails out states like California (which if a stand-alone nation would be the world's 7th largest economy), Illinois and New York. I could go on but its too troubling.. But I see no evidence that this government will stop bailouts. And it really doesn't matter if a Dem or Rep is in office- it just keeps continuing.

[Youngworker]

Unemployment is still bad.

[SMU Cox MBA]

It's really simple. We buy up all the Eurodebt we can. We sell it to China to pay off our own debt. Then CHINA has to figure out how to keep the EU afloat.

[sharonsj]

What economic recovery? Come on, only the stock market has recovered and that's because it's being propped up. But that can't last. Meanwhile, the rest of us are still going down the tubes. 20% unemployment and underemployment doesn't leave much money to waste in the stores, so no wonder commercial real estate is going under. After paying for the basics, there's not much left to spend on cheap, poisonous, falls-apart-in-days Chinese crap.

[ykw]

Next up, BRICK wall:

So, the empire bred its participants to behave like robots, in a fully integrated global circuit of click gears, publicly and privately, systematically replacing them with electronic robots as the economies matured, and financed the process by robbing Peter, as an asset base upon which to lend to Paul, which dutifully bought into the empire, putting Peter in jail to avoid repayment, and repeating the process with Paul and Fred, driving demographic acceleration to hide the long-term costs off-sheet and pull revenues forward at 30k:1 leverage, with family law, killing off the rest of the natural food chain, and replacing it with factory farming, to keep the ponzi scheme going, employing electrical and monetary relativity, which its proprietors did not understand.

Now, they are going to hit the BRICK wall, at which time the empire will “suddenly” see the K economy, turning a single phase motor into a 3-phase motor, with or without the empire, with or without that $500T load. Whether or not the empire saddles a dead horse is completely at the discretion of the empire, but the motor is capable of picking the load. The result will determine load distance of travel, into orbit or into the rocks below.

What is bottom up?

An architect enters an enterprise at the bottom, and immediately increases productivity of her crew. The response she is looking for is an increase in pay for the entire crew, in quality of job conditions – increased management respect, increased crew discretion over work processes, increased crew discretion over allocation, increased pay, etc. Quality of job reduces personal and social expenses (public, private, & non-profit agency), increasing economic profit. If she doesn’t see that, she moves on to the next enterprise.

If she does see it, she immediately increases the productivity of all associated crews, and so on, giving management an example of how to increase productivity, including the information system reorganization required to leverage the outcome. Because other organizations have to keep up, it’s like dropping a rock in water, creating waves in a pool. Enterprise architecture is like skipping a smooth rock across the lake.

The current response by management, at the direction of the empire, is to view the architect as a threat to the status quo, to be destroyed as an example to others, but only after stealing as many ideas and productive capacity as possible. The architect will bypass all of that for some time, if the enterprise has core potential, if the sprung waveform can trigger catalysis gain in associated enterprises, waves driving waves.

Few specialized architects are required, because humans are natural-born architects. The capacity has simply been bred out by the empire system. To the extent an architect is rewarded, the organization catalyzes quickly, because those latent, inherent skills are reawakened across the workforce. In this rare event, the empire kills the wave through mergers and acquisition, or by replacing management through fiat.

Have you noticed that the who-you-know, global HR function places cattle call advertisements for $10/hr economic slave labor, requiring $200k in irrelevant education, to create a revolving door of artificial demand and supply, hoping that these slaves will impart the pieces needed to continue existing operations?

When a worker gets into his car and goes to McDonalds for lunch, all economic profit for the day is lost, due to the deficit created by oil and healthcare. The empire has put all of its participants to sleep, with the narcotics of oil, fast food, and entertainment. Workers go to Walmart, thinking they are saving money, but the Walmart distribution system increases the price of oil, which increases all their other costs, and eliminates their revenue with cheaper labor elsewhere. Then their pension plans invest in the McDonalds/Walmart ponzi scheme, multiplying their losses to the empire.

The first step is to wake up. The next step is to not take system gravity personally (wasted friction that the empire feeds on). The quickest path between 2 points is not a straight line by sight; it involves gravity. The system under construction requires participants to change hats, to know when to feed gravity and when to starve it, when to work in the light and when to work in the dark, to employ the vortex of the looking glass.

Bosses are paid very well, to be figureheads. If the workers and bosses keep that in mind, everything else will work itself out. When a majority starts assuming that the empire is the universe, and take the top-down, command and control, divide and conquer system seriously, things go very bad. The empire is just the bed, the copper, across which the electron pressure flows to deliver current, for economic circulation. It is not the only conductor in the universe.

You have to connect the conductor to the terminals. The empire only understands itself. It can conduct, open, or short. Do you really think that Barack Obama, Warren Buffet, or even Bill Gates understands the technology?

So, you have 5 workers in your business, 2 older workers training 2 younger workers, with 1 middle-aged supervisor. You have to care about demographics initially, because the empire has destroyed the demographic balance, and you need to artificially substitute that balanced feedback signal to prime the community pump. Over time, you can migrate from 10/30 to 30/10, creating 3x average worker pay in profit. As business goodwill increases to accommodate investment leverage, that goes up to 5-10x, creating sufficient return for equilibrium voltage potential.

See you again when the global economy hits the BRICK wall …

[rhon]

How many bailouts have gone around? How many will pay it back?

[Jen]

NEW YORK - Investigators combed through security video and other evidence on Monday in the hunt for suspects in a replica rolex failed car bombing in New York's Times Square. New York Police Commissioner Raymond Kelly said a white man in his 40s was spotted in security video footage about fake watch half a block from where the vehicle was left on Saturday evening with its engine running and hazard lights flashing. In a video fake rolex watch released by the police, the man, who appears to be thin, is seen removing a dark shirt, stuffing it into some sort of bag and walking away down the sidewalk, carrying the bag and glancing at least twice over his shoulder.