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Retail Real Estate Bubble? Watch out for Strike Three by Monte Lee-Wen
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 time.
The Lenders just don't trust that there is any value at all in the collateral on their loans. At street level, underwriting has become much more conservative.
Your project HAS to be profitable with the most conservative of income and expense assumptions. Lots of deals that would have gotten funded 6 months ago are falling out of escrow when no lender can be found
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.
Here are 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. In January 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 - Overbuilding - Residential Collapse - Recession
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 we are almost exclusively focused on this Asset Type for the foreseeable future.
And with the more conservative underwriting needed to get your loan these days, you can only finance a superior deal. Once the market turns out of this recession you should have a genuine cash machine in your portfolio.
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