Wednesday, September 8, 2010

Commercial Real Estate Opportunity

Commercial Mortgage Backed Securities (CMBS) is the term for real estate mortgages that are packaged together and sold to investors, banks, pensions, etc. (Residential mortgages (RMBS) are bundled and packaged the same way)

Data released for the month of August shows all CMBS with a delinquency rate of 8.92%, a new record.

Multifamily (Apartments) - 14.53%

Hotels - 18.92%

Retail - 6.76%

Office - 6.57%

Retail and Office lag multi-family and hotels due to the long term leases in place with their tenants.  Leases usually run 5 years or longer, where multifamily leases run 1 year or less and hotels change nightly.

Why are these numbers important?  Who cares about these investors taking losses on these loans, right?

Here's why:

When a bomb goes off in the financial world investors run for their lives.  It is also very unusual for them to immediately return to the place where they were just burned.

This creates the boom, bust cycle.  It also creates value opportunities for contrarian investors.

Between 2010 - 2014 there are $2.3 trillion in commercial real estate mortgages that will need to be re-financed.  When these loans were made the investors were counting on the CMBS market to refinance the debt.

That market is now non-existent.  The investors have all scurried away.

The majority of these $2.3 trillion in loans are underwater.  There is no possible way they can be refinanced, and no "solution" has been presented thus far by our government or the Federal Reserve on how this problem will be resolved.

The reason I study and work in the commercial real estate industry is because I believe that we will soon enter a government debt crisis in the face of high inflation.

The government who now saves and nationalizes everyone and everything with endless debt, will soon have to choose who it saves.  This is very important to think about as an investor because the government is heavily involved with every market. 

I believe the government will choose to send unemployment checks, pay social security, medicare, and military costs before they save the commercial real estate investors.  They will go after the largest supply of votes.  

If that scenario takes place commercial real estate prices will collapse and tremendous bargains will appear.  They are now artificially propping up the stock market and real estate market.  Will they have the power to hold up commercial real estate too?  Will they have the will?

I don't think so, and I plan on being ready when prices fall.

No comments:

Post a Comment