The sector of commercial real estate has been in a slow motion collapse for a year-and-a-half now. The property values plummeting, led by the economic slowdown, have dissolved the huge amounts of equity that had existed before the recession. Now, although the buildings have an inherent underlying value, a large percentage of commercial real estate acquired in '05, '06 and '07 is virtually worthless to investors who bought them.
They can not be refinanced, they can be sold and few are willing to inject enough capital to make them financially healthy again. A market is broken and the face of a virtual tsunami of offices, retail outlets, warehouses, hotels and housing projects that are about to be abandoned by, or rested from investors who borrowed hundreds and hundreds of billions to buy them.
The problem is massive and the resolution will involve pain and suffering massive financial. The banks will fail, developers and investors, large and small, public and private business will, misguided lawmakers will try shifting much of the burden on tax payers condemned attempts by the bailout and budget busting great abundance will evaporate. All this happen during an extended period of time.
The huge amounts of money are piling up in the meantime on the sidelines. REITs, wealthy individual investors and private firms from the commercial real estate are all successful large amounts of capital increase and get ready to jump in when the time is right. They are waiting for two things: low prices reflect a market value undeniable and reliable credit.
The prices are getting lower as a newspaper owner, sponsors and distributed that allowed lenders, slowly coming to accept the magnitude and real direness of their situation. A flooded market bargain hunters will seek out and tempt you with bargain prices. Weak banks and / or absurd be taken over by the FDIC and placed in more responsible hands.
The survival of the strong banks will find themselves encouraged with all assets but none of the responsibilities of banks to force them to buy. New loan applications will be supported by healthy down payment and reasonable purchase prices and they will be sponsored by successful business people with impressive resources. The banks will lend and the recovery will be underway in earnest.
We can have confidence that markets work but we must realize that the functioning of markets involves extracting a price before transporting an advantage. The price must be paid and around the edge while it is away is nearby.
Wednesday, January 6, 2010
