Q2: Office, Mall and Lodging Investment

[mEDITate-OR:

wonder why they are offering more space, more improvements, more of everything...

including lower rents...

We are only just beginning to see the CMBS problems.

This quarter there was huge increase in defaults, refinances and foreclosures.

What you and CR may be missing is that many properties are "changing hands"...

we are NOT going to accuse "them" of the West Seattle S&L "bad loan" trades from that mess...

however, what we DO see is the IF there is any "equity" in these they are being rolled over and/or sold for cash.

IF there is NO equity, they are still being rolled over, with a delay and pray game plan.

Many of these have already been converted into "interest only" loan payments.

Some have been converted into "how much you getting in rent" loan payments.

But, most of the new REITs that were formed to buy "on the cheap" troubled RE still have not found anyone willing to sell, and take the loss. Just as most CMBS lenders, particularly the small local banks, simply do not have the "equity" themselves to cover the write downs. They HAVE to hold these properties. So, there are few sellers.

Lenders do NOT want to "own" these properties, and they do NO want to manage them. So, no matter how bad the current "owner"/managers are, they will be left in place.

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This [First] graph shows investment in offices as a percent of GDP. Office investment as a percent of GDP peaked at 0.46% in Q3 2008 and has declined sharply to a new series low as a percent of GDP (data series starts in 1959).

REIS reported that the office vacancy rate is at a 17 year high at 17.4% in Q2, up from a revised 17.3% in Q1 and 16.0% in Q2 2009. With the office vacancy rate still rising, office investment will probably decline further - although most of the decline in investment has already happened.

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The second graph is for investment in malls.

Investment in multimerchandise shopping structures (malls) peaked in 2007 and has fallen by over two-thirds (note that investment includes remodels, so this will not fall to zero). Mall investment is also at a series low (as a percent of GDP) and will probably continue to decline through 2010.

Reis reported that the mall vacancy rate increased in Q2 2010, and was the highest on record at 9.0% for regional malls, and the highest since 1991 for strip malls.

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The third graph is for lodging (hotels).

The bubble boom in lodging investment was stunning. Lodging investment peaked at 0.32% of GDP in Q2 2008 and has fallen by over 70% already. And I expect lodging investment to continue to decline through at least 2010.

As projects are completed there will be little new investment in these categories for some time.

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Q2: Office, Mall and Lodging Investment
http://www.calculatedriskblog.com/2010/08/q2-office-mall-and-lodging-investment.html
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