The Coming Meltdown in Commercial Real Estate

[FOTD]

"It's very analogous to what happened with the residential market," said Mark Friedman, a prominent Sacramento commercial developer. "Money was cheap, growth was rapid, and we built a lot more product than we needed."

Rise in commercial real estate vacancy rates leads to meltdown concerns
http://www.sacbee.com/847/story/2181051.html

Forbearance. Time is running...lots of banks to go down. The newest terminology is pretend and extend when it comes to bad loans.

Is this the second coming?

[YoungTulsan]

There is an absolute glut of office space and retail space.   Ignorant planning, and unwise financing will eventually fail to sweep the fundamental problem under the rug.

[Conan71]

I hate to buy in, FOTD, but sure looks and smells like a reality.  I'm already imagining the sound of fecal matter hitting the oscillating cooling device.

[DTowner]

Surely it is only the poorly managed properties that will go under...

[nathanm]

"It's very analogous to what happened with the residential market," said Mark Friedman, a prominent Sacramento commercial developer. "Money was cheap, growth was rapid, and we built a lot more product than we needed."

Rise in commercial real estate vacancy rates leads to meltdown concerns
http://www.sacbee.com/847/story/2181051.html

Forbearance. Time is running...lots of banks to go down. The newest terminology is pretend and extend when it comes to bad loans.

Is this the second coming?

Coming meltdown? How about the meltdown has been with us since at least the beginning of the year. It just doesn't get the press that the rest of the recession/mini-depression/destruction of trillions of dollars of wealth/whatever you want to call it does.

[YoungTulsan]

Surely it is only the poorly managed properties that will go under...

Not when everything is financed by a system that only operates trouble free on perpetual growth.  Our financial system is essentially a giant pyramid scheme, and we always keep the growth going longer than we should for fear of the inevitable collapse.  Eventually, the collapse happens.

[Wrinkle]

Not when everything is financed by a system that only operates trouble free on perpetual growth.  Our financial system is essentially a giant pyramid scheme, and we always keep the growth going longer than we should for fear of the inevitable collapse.  Eventually, the collapse happens.

That's what percentages are for, if they'd just use them.

But, even our city isn't happy with their 3% of everything that happens.
"We must find new revenue sources" is the flagship of the current administration.

The concept of percent is self-adjusting to match escalation. In their case, they wish to cause escalation, take a larger part of the pie and expect the pie to grow, too. It can't work that way.

But, what you're suggesting is not that. Your saying free markets fail, and they don't if left free. It's only when government controls markets and monopolies form that it fails. And, when government becomes the monopoly, we have socialism.

[Wrinkle]

Not when everything is financed by a system that only operates trouble free on perpetual growth.  Our financial system is essentially a giant pyramid scheme, and we always keep the growth going longer than we should for fear of the inevitable collapse.  Eventually, the collapse happens.

btw, you're also wrong about perpetual growth.

It does not depend on that at all. But, when it is forced, and failure taken off the table, then the public gets to pay.

And, now they're telling us we shouldn't be mad about it either.

[nathanm]

The concept of percent is self-adjusting to match escalation. In their case, they wish to cause escalation, take a larger part of the pie and expect the pie to grow, too. It can't work that way.

But, what you're suggesting is not that. Your saying free markets fail, and they don't if left free. It's only when government controls markets and monopolies form that it fails. And, when government becomes the monopoly, we have socialism.

Yes, the relative stability between the end of WWII and the beginning of the dismantling of the financial regulatory framework in the early 1970s was a fluke, and the instant crisis was caused by regulation. 

Perhaps you should familiarize yourself with the regular panics that beset our financial "system" before significant regulation existed. That might disabuse you of the notion that we have no economic troubles when there is no regulation.

Moreover, your post is a contradiction. Monopolies form in absence of government action. Dare I say regulation. I do agree that the government has been lax over the last 10 or 15 years about (but most especially in the last 8 ) regarding enforcement of the antitrust laws on the books. The problem isn't monopolies, however, it's largely the abuse of the system by participants in the financial markets.

http://www.rollingstone.com/politics/story/29127316/the_great_american_bubble_machine

[Wrinkle]

I'll read the lengthy article later and reply.

But, there's a difference between 'control'/'regulation' and 'monopoly' of markets. And, when regulation is used to produce monopolies, therein lies one of the problems.

Abuse is something else again.
And, the abuse you refer is a result of lax enforcement of regulations, or a failure of regulations to keep up with current trends.

When the result of enforcement is neither disincentive, punitive nor recovers losses, it's of little use. The risk is small.

What good is a law if it's not enforced? (point: illegal immigrant employment, as example).

[nathanm]

But, there's a difference between 'control'/'regulation' and 'monopoly' of markets. And, when regulation is used to produce monopolies, therein lies one of the problems.

I'm curious to know what regulations create monopolies, other than utilities. I'm sure they exist, I just can't think of any at the moment. Not since we broke up Ma Bell and ended the duopoly in wireless communications, both many years back.

[Wrinkle]

I'm curious to know what regulations create monopolies, other than utilities. I'm sure they exist, I just can't think of any at the moment. Not since we broke up Ma Bell and ended the duopoly in wireless communications, both many years back.

First thing which came to mind were Fannie Mae/Freddy Mac

...government sponsered, no less.

Monopolies do not need 100% of a market to control it.

2nd thing as I write, Gold Mansacks.
Read your own reference article.

[nathanm]

First thing which came to mind were Fannie Mae/Freddy Mac

...government sponsered, no less.

Monopolies do not need 100% of a market to control it.

2nd thing as I write, Gold Mansacks.
Read your own reference article.

I don't see how the Mansack counts as a monopoly. Or at least it didn't before they tossed a grenade into the middle of wall street.

I suppose I can see how you might think that Fannie and Freddie monopolize the mortgage market, although it's not really accurate to say that. There is plenty of opportunity for others to fund mortgages. (That's what the CDOs the Mansack was peddling were all about, in fact!)

Hell, my bank keeps most of their mortgages on their book rather than passing it off to Fannie or Freddie.

Fannie and Freddie strongly influence the market in the same way that Citi, JPM, and BoA influence the banking market, but it's not accurate to call any of them a monopoly.

Since you have me on the topic, I just want to put this out there: If we force Fannie and Freddie to fail, which will likely be the only way they actually do end up failing, the damage to the housing market will be enormous.

[YoungTulsan]

btw, you're also wrong about perpetual growth.

It does not depend on that at all. But, when it is forced, and failure taken off the table, then the public gets to pay.

And, now they're telling us we shouldn't be mad about it either.

I'm talking about the very basic level on how money is created in the Federal Reserve System.   All money is debt.  The way money enters the system is when the Fed lends it out.  It eventually has to be paid back, with interest (more paid back than given out) - The only way the system keeps going is to constantly lend out increasing amounts of money.  If no one is borrowing money (Which in the basic workings of the economy, would mean no one is producing things which are lent against) that means no new money is being created, while all the old money is flowing back to the Central Bank.  That is what happened in the Great Depression, it was a deflationary collapse.  There simply was not any money.

They haven't really fixed the problem since the Depression, they have only figured out new ways to cheat and pump more money into the system to keep things moving forward.  We haven't seen a real deflationary depression since then, but we are dangerously close to having a hyperinflationary one.  Deflation was on the horizon last year when the financial system came to a halt.  The solution was to create new ways to borrow more money, based on nothing, and pump it into the system.  Trillions of dollars are entering the system with no real value or production to show for it.

Once you allow money to be borrowed without being attached to real value, that is when things get out of hand.   Huge gluts of something will accumulate (ie. the housing crisis, or as being discussed here, commercial properties) and the problem becomes unsolvably huge before anyone tries to stop it.  That is where we are now.

Again, I'm ranting against the very basic workings of the Federal Reserve System.

We don't really have free markets as long as a private banking system (Fed) controls our money in cahoots with the government in power trying to cheat us out of much needed recessions for short term political gain (This applies to the Republicans and Democrats, I'm not Obama bashing).

[FOTD]

Here's the latest: http://www.washingtonsblog.com/2009/09/treasury-admits-economy-still-in.html

MONDAY, SEPTEMBER 14, 2009

Treasury Admits Economy is Still in Trouble


"The perma-bulls say that the economic crisis is over.

But a new report from Treasury entitled "The Next Phase of Government Financial Stabilization and Rehabilitation Policies" indicates that the banks and the financial system will need to remain on life support for the indefinite future:

Although we are rolling back emergency support programs that are no longer needed, significant parts of the financial system remain impaired. Unanticipated events could intensify pressure on the financial system. In this context, it is prudent to maintain capacity to address unforeseen developments [i.e. life support] ...
The normalization of financial markets achieved to date is partial and fragile, and the economic recovery is, at best, in its very early stages. In residential real estate, although the rate of deterioration has slowed, the market has not established a firm bottom ... and foreclosures continue to rise across all classes of mortgages, with prime mortgages now leading the way. The restructuring process for the commercial real estate market has only recently begun. The pace of bank failures has increased and it is expected to remain elevated for some time. However, liquidity-induced failures have steadily decreased given the existence of deposit insurance and the orderly resolution of failed banks. Moreover, the FSP in general and the SCAP in particular were designed to ensure that the financial system as a whole had the capacity to continue to perform its vital functions while dealing with these challenges.

During this difficult period of adjustment, the system could be sensitive to unanticipated market events. Further, in those markets where conditions have improved, it is unclear whether the improvements achieved to date will persist without a period of continued government support. "