Archive for April, 2006

Date: April 25th, 2006, Filed under Uncategorized

MercuryNews has an article titled Luck runs out for `Condo King’ about Jorge Perez’s recent cancellation of the ICON twin-tower. Perez is also a partner with actor George Clooney is a multi-billion dollar project to put up an 11-tower condo complex in Vegas. Both have massive amounts of money, but not nearly enough to spend billions on such a risky investment. If they’re pulling out, it may be because their backers aren’t so happy with the Vegas property market which continues to have bigger and bigger sales inventory that no one is interested in. I really wonder when real buyer interested started tanking — it would seem to me that bubble peaked a year or two ago as the most recent buyers are speculators, not people living in properties they own.

In the past few months, I’ve seen a growing number of “dark condos” in my own county — condos that are sold, but not occupied. Many owners are afraid to rent these condos as they can’t advertise the units as “never lived in,” but the longer they wait, the lower rents will go as the supply of available rentals gets even higher. The low interest rates made many renters into owners, which left a large supply of rental units in my area.

Foreclosures.com has an article regarding a big condo market: South Florida Condo Market May Collapse, Sparking Wave of Foreclosures ForeclosureS.com president Alexis McGee says 25,000 condos were under construction in the Miami-Dade area, more than the total that have sold in the last nine years, and speculators held 75% of them. 75% of those condos is just under 19,000 units that are held by speculators. That leaves about 6,000 condos for sale from owner-occupiers. If 25,000 condos haven’t sold during the housing boom, how many will sell during the decline and bust?

Discuss this article at the housing bubble forum.

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Date: April 25th, 2006, Filed under Uncategorized

Yesterday I was lucky enough to have worked an entire day at one of my favorite customer’s offices in what has become a replacement for Chicago: Schaumburg, Illinois. Schaumburg has boomed over the past 5 years, with housing prices almost doubling in some areas. Along with a growth of wealthy residents there has been a huge boom in retail and commercial properties: there are currently numerous multi-use buildings going up in that region. A few years ago I was wondering if the region would look like Chicago in 20 years.

My drive through the various commercial regions in the area had me speechless, just as had the residential markets in the same areas. Along with the blocks and blocks of for-sale signs in the very wealthy neighborhoods, there were literally miles of competing signs offering office space, retail space and industrial space for lease. In one block I don’t think I saw one building that wasn’t offering a significant portion of property for lease.

I’ve been thinking more and more of the problems that the inflationary policy of the Fed may have created, even beyond housing. I myself invested in a retail business that failed (not due to lack of profit, due to bad management and paperwork). The business likely would have failed, anyway, as our products were almost always paid for with credit cards that I knew were not top notch credit companies. I invested 6 figures in this business over 4 years, seeing all this new money in my pocket and wanting to do something with it. The freedom-thinking side of me forgot about how inflationary money causes you to put it in the wildest investments.

This easy money caused me to expand faster than I should have, and buy products at a price higher than I should have. I also didn’t realize how much of my retail market was based on consumer borrowing-and-spending against their inflating homes. All around my retail stores we saw more stores open, and I saw more friends get in the business. There was all this money to make, and we saw our charts moving up and up and up. Sales kept growing, doubling and even tripling every years. Profits were stagnant, but I attributed it to dotcom competition, not a risky dollar. As more and more competitors entered my market, we all blossoms together, and our suppliers opened warehouses closer to our markets. Competitive wholesalers were opening left and right, and everyone had a new product to sell that was no better than the previous ones. Most manufacturing moved from the U.S. to Asia over the 4 years I was in the retail business. From about 70% in 2000 to 20% in 2005: manufacturing had left the States.

As more and more companies needed retail space, warehouse space and support space, more investors bought and built more commercial property. There was a time when I couldn’t negotiate a lease because 5 other people wanted the property more than I did. I don’t remember seeing many vacancies in even the worst-located strip mall in my county, and I remember seeing many forests cleared to build new strip malls in even worse locations. Every saw the charts going up in gross income, but very few saw the reality of the source of this growth: housing.

I’ve always said that bubbles create bubbles create bubbles. As bubbles grow and pop, the Fed never stops printing more new money, and the old printed money is still in existence somewhere in some market, waiting to create a new bubble.

Deloitte and Touche doesn’t have the greatest forecasting success rate, but they keep on forecasting. This time they say there is no commercial bubble. There is still high demand for commercial space because there is still money being loaned out. A 10% loan for a home sounds like a lot, but a 10% loan for a business is nothing. People borrow, they spend, they grow, and they hope that profit will come some day. Most are wrong.

There might not be a visible bubble in Commercial Real Estate right now — many business owners are triple mortgaging their homes to try to stop the bleeding in their businesses. In the past year I’ve seen 6 profitable businesses go under when their customers all left in unison, not buying the product from anyone anymore. These businesses left behind multi-year leases that no one wants. When the leases were in high demand and low supply, the property management companies spent a fortune of future income on upgrading their properties and building a big team of agents and lawyers who handle the leasing and management of the leases. When more companies fall apart due to the dollar’s declining value, how many of these people will be out of jobs, unable to continue buying and keeping their local industry healthy?

I do believe we’re in a Commercial Real Estate bubble, but the housing bubble allowed many people to hide it by investing more and more housing equity in their failing business. Things will pick up, I always heard. The market always grows, right? Drive around your favorite retail strip and see how many “For lease” signs you see. When those signs change to “For sale,” the bubble has come to an end.

Discuss this at the Housing Bubble forum.

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