Blood in the Streets? - Posted by ray@lcorn
Posted by ray@lcorn on October 17, 2002 at 18:41:59:
I just got these off of Globe St. news service… I’ve seen a number of indicators lately that things are coming to a head. Is this the tip of the wave, or a drop in the bucket?
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50% of Office Markets “Distressed”
According to a new report by Merrill Lynch, nearly half of the 86 office markets that it studied are considered “distressed markets”, meaning that the imbalance between supply and demand for office space is so high that market rates will probably stay depressed for many years to come. The report indicates that the national office vacancy rate rose from 15% at the end of 2001 to 17% at the middle of 2002, and there is little hope for a recovery in the next 18 months. The lack of demand for space is the major cause of the gloomy office market, with nationwide demand shrinking about 4.5% in the last 18 months. Competition for tenants is leading to decreases in rental rates.
Three North Texas Companies Struggling
One hotelier jumps from the NYSE to refuge on AMEX a convenience store/truck stop owner retreats from AMEX to go private; and yet another real estate holder transfers all hard assets to its lender for debt forgiveness. All are based in Dallas-Fort Worth. Wyndham International Inc., under an NYSE red flag for trading below $1 for more than 30 days, will say goodbye to the exchange now that AMEX has cleared the deck for its listing. FFP Partners is voluntarily exiting AMEX and has plunked 166 convenience store/service station properties on the market. CoServ Realty Holdings LP agreed to transfer all real estate assets to a subsidiary of its lender in return for $365 million forgiveness against its related debt to the lender.
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This is me taking now…
I’ve been pessimistic about recovery talk for the last year. The only sectors yet to display overt failures are residential and retail.
The warning signs are in place for a retail decline (e.g. Walmart has now revised their sales forecast to flat with last year, after forecasting 4-6% increases; Target and others have followed suit; department stores were already reporting negative growth). My guess is that this Christmas season is going to finish the job started last Christmas, and only the discounters will come out with very small same store sales increases. The list of retailers that are paying more for inventory borrowings than their sales margins grows longer each month. Except for credit tenant single user deals, development has ground to a halt. Prices are still firm, likely due to cheap money and the fact that real estate appears to be a safe port from the Wall Street malaise. Money is available at rates like never before, but the fundamentals have changed to emphasize dark asset value (bricks and dirt) rather than income based valuation (cash flow and credit quality).
The holdout is residential. The housing market is propped up by low rates and refinancings. But how low can you go? Indications are the Fed will go another round of cuts, but they don’t have much to work with. And when do the chickens roost? Delinquincies are climbing to higher and higher levels, and foreclosures are also on the rise.
Multi-family has historically weathered downturns well, if not strangled by debt. People have to live somewhere, and we are still making more people. The markets showing weakness are those positioned to flee from… those empty office buildings have empty chairs in them. No job, no prospect of a job = move. Will all markets feel it? No. But the ones that do will be the mine canary for the rest.
Deflation is a word being bandied about in the media, including the usually optimistic sources tied to trade publications. Can it happen? Sure. Will it? War and oil are the wild cards.
Gearing up the war machine will spike productivity, marginally decrease unemployment, and perhaps raise the patriotic spirit. On the downside war will will raise the cost of money due to deficit spending, and destabilize the oil markets. As oil prices and global tensions rise, travel will decline even further than it has already. It is estimated that one in five dollars of our GDP are related to tourism and travel. That’s a significant segment, and the ripples will be waves. But worst, war will divert talent, capital and time away from our real problems.
There will be opportunities for those that are positioned to capture them. It will take patient money and strong credit to catch good properties falling on hard times. Stay tuned.
ray