Sometimes, it takes hours upon hours of combing through data to spot a major cycle turn.
Sometimes, it’s as easy as opening your eyes to what’s happening all around you.
That brings me to the subject of commercial real estate (CRE) and the real estate investment trusts (REITs) that own it. I’ve already talked about the challenges facing the multifamily/apartment subsector. And I’ve discussed the problems retail REITs face because of lackluster retail sales and the “Amazon.com effect.”
|A portion of Mike’s “Real Estate Tour.”|
But I think that when it comes to the state of CRE overall, at least in my own back yard in Florida, some of the best insight has come from getting in a bike saddle and hitting the road. So as part of my continuing efforts to highlight a very important economic and investment trend, take a look at these two links:
They show dozens of pictures from three “Real Estate Tours” I took around northern Palm Beach County on my road bike. I covered about 60 miles in total this past weekend and a few weeks earlier. I canvassed both newly developed real estate corridors and zones where the properties are older. Most areas were relatively affluent, though a handful were less so.
The inspiration behind the project was simple: Back in the mid-2000s, the most obvious signs that the housing bubble was popping were quite literally, signs. On any given weekend starting in 2005, you would find scores of “For Sale,” “For Sale By Owner,” and “For Rent” signs in front of newly built subdivisions, condominium buildings, apartment-to-condo conversion projects, and more.
It signaled that homeowners and developers were getting increasingly desperate. And no wonder: Sales were slowing, supply was surging, and prices were dropping.
Fast-forward more than a decade, and I’m seeing more and more real estate signage flooding the market again. Only this time, the signs are of the “For Rent,” “For Lease,” and “Space Available” variety – and they aren’t in front of residential developments. They’re littering the landscape in front of office, medical, retail, and industrial real estate.
So I set out to catalog what I was seeing. The results are what you see in the linked photo galleries.
I should make clear that the pictures do NOT just show a couple of properties cherry-picked here and there. They show minor and major intersections where CRE on every corner has space available. They show stretches of road with multiple office buildings, one after the other, looking for tenants.
They show how brand-new projects are being developed or opening up right next to, or across the street from, existing properties with “For Rent” signs plunked on their front lawns. And they show that landlords for both older and newer properties – in several CRE subsectors – are trying to fill space.
Is it local? Anecdotal? Maybe to some extent. But it corroborates what I’m increasingly seeing in other markets – and what I’m increasingly seeing in the national data.
It also “fits” with the tightening we’re seeing in commercial real estate lending standards, illustrated by the chart below:
|Federal Reserve’s quarterly survey.|
The chart comes from the Federal Reserve’s quarterly survey on bank lending. The higher the bars, the more banks are cracking down on qualification standards for CRE loans. Why would they do that? Because regulators are pushing them to and/or because they’re worried about losing money from rising CRE delinquencies and defaults.
My advice? Continue to steer clear of most REITs, particularly those in subsectors like multifamily and retail. If you own individual commercial properties and you’ve been enjoying a nice run thanks to soaring prices and strong demand, consider cashing in. The cycle is turning, folks, and you don’t want to get caught flat-footed by the fallout!
Now let me open the floor up to you. Are you seeing similar things in your own back yard? What is your personal experience with office, multifamily, or retail property? Do you own any and are you having trouble filling space (or are you expecting to in the future)? What does this mean for REIT stocks? Use the comment section to share your opinions.
Record-low interest rates … volatile stocks … Brexit and terrorism concerns: Those were just a few of the topics you weighed in on over the last couple of days.
Reader Stephen sounded a skeptical note about the stock market, despite recent oversold conditions. His take: “What would be the catalyst for a rise to 2,400 in the S&P 500? Excessive bearishness? European bank failures? Chinese deflation?
“The perma-bulls have been saying this for over a year now. I would never bet against this algo-driven speculative orgy. But my expectation is we will get a correction before we get a breakout to the upside. Besides, the Fed needs a crisis to reverse course and launch QE4. It seems to me, the algos know this.”
Reader Mike also picked up the skepticism torch, saying: “Don’t you want to look at fundamentals? Is there a reason why investors are bearish? You betcha. Look at debt. Europe is imploding. Banks (e.g. Deutsche Bank (DB) are not doing well. So while historical data is interesting, don’t forget the fundamentals that drive the market.”
But Reader Tommr said he’s looking for a silver lining amid that bearishness: “I could not be happier about the market worries over rate hikes, Brexit, terrorism and all the other things. This is the kind of market condition that Sir John Templeton referred to as the market growing on skepticism. This is the classic ‘Wall of Worry.’ Bring it on! Every time one or more of these conditions resolves, the markets shoot up.”
As for NIRP and ZIRP, Reader Michelle said: “What’s going on? Simple: Those with money have too much money. Governments and banks are able to charge those with money to handle their money and keep it safe (?) instead of paying interest. It’s what the market will bear.
“The rest of the world can’t borrow due to lack of credit and income, so no interest can be paid. Thus, there is a lack of demand for money. The market for money that we have created is ineffective for all.”
Finally, Reader John offered the following take on the recent Orlando attack: “Terrorist strikes in our country can happen in tens of thousands of public places. The authorities are powerless to stop such an overwhelming amount of possibilities. I take the NRA’s stand. To stop these events or limit loss of life, arm yourselves.”
Thanks for commenting on these important matters. While stocks attempted to make a stand in the last 36 hours or so, I’m seeing a lot of troubling action behind the scenes. Even the Federal Reserve appears to be giving up on the long-term outlook for the U.S. economy, and flip-flopping all over the place with every wiggle in the data or the stock market.
That’s not a confidence-inspiring situation. The major turn in the credit cycle that began in mid-2015 is also continuing to influence many markets, and drive volatility steadily higher with time. So stay cautious, stay safe, and stay tuned in to Money and Markets for additional general guidance. I have specific “buy” and “sell” signals, recommendations and more-detailed advice in my Safe Money Report.
On the topic of real estate, the regional bubbles in massively overpriced areas like San Francisco and Silicon Valley appear to be popping, according to Bloomberg. Inventory of high-end homes for sale is surging, while rent growth is slowing – a natural side effect of the parallel bust in the tech unicorn bubble. Or in other words, it’s all just another piece of evidence that the credit cycle is turning.
Still on the same topic, we learned this morning that May housing starts slipped 0.3% to a seasonally adjusted annual rate of 1.16 million. Building permits inched up by 0.7% to 1.14 million. Those results were largely in line with expectations.
But construction spending has been starting to slip, and the construction industry just shed jobs for two months in a row – something that hasn’t happened since 2012. More cracks in the foundation? Looks like it to me.
Dozens of U.S. diplomats protested the Obama administration’s approach to Syria and President Bashar al-Assad, according to the Wall Street Journal. They said in an internal memo that we should bomb Assad in order to help further the campaign against ISIS. The current administration has focused solely on taking out ISIS fighters and leaders, and avoided taking sides in the nation’s civil war.
Central bankers, British government officials, and multi-national organizations, like the International Monetary Fund, continue to warn about fire and brimstone raining down on the world if the “Leave” campaign wins. But the population doesn’t seem to be buying the dire economic forecasts, according to this piece in the New York Times. Those who favor leaving tend to downplay the economic worries, and view the Brexit vote through the lenses of national self-determination and immigration instead.
So what do you think about the latest twists and turns in the Brexit saga? How about the fight against ISIS in Syria – is there more we should do there? Any thoughts on the dual deflation in overvalued real estate and tech unicorns? Share them in the comments section when you get a minute.
Until next time,