Monday, April 20, 2009

Commercial Real Estate Problems Piling Up

Though it gets little in the way of airplay on the blog, real estate happens to be one of my favorite asset classes. It is volatile, can be highly leveraged and also provides what I call “use value,” meaning that it is not necessarily just a piece of paper you hope will appreciate, but can also be tangible property that you can get some enjoyment out of. For the same reason, I would much rather have a Miró hanging on my wall than an investment in an art ETF.

Getting back to real estate, I theorized in Waiting for the Next Shoe to Drop that either credit card debt or commercial real estate would be the most likely candidates to usher in the next leg of the financial crisis.

Moody’s recently reported that the U.S. credit card charge-off rate rose to a record 8.82% in February and noted that they expect charge-offs to hit a peak of 10.5% during the first half of 2010.

The ticking bomb of commercial real estate may have even more severe consequences as commercial real estate prices continue down over the course of the next few years. A week ago, Fil Zucchi did an excellent job of explaining the problems in commercial real estate at Minyanville in A Commercial Real Estate Comeback? and today he is back with a follow-up piece, Ten Reasons Why Commercial Real Estate Won’t Rebound.

There are many ways to play real estate. The double ETFs, URE (+2x) and SRS (-2x) are a good place to look for trading vehicles. For non-leveraged plays, IYR offers the best liquidity and an active options market to boot. Given the strength of the recent bounce in real estate stocks (more than 50% off of the recent bottom, as the chart below shows), I would favor the short side at least until I get a better sense of how the commercial real estate story will unfold.

[source: StockCharts]

Disclosure: Short IYR at time of writing.


Anonymous said...

naturally YMMV....if you believe that the continual offshore outsourcing of back-office/low-value-added white collar work is a secular phenomenon, then you should stay away from US commercial real estate....especially the second tier cities.

Eric said...
This comment has been removed by the author.
Eric said...

I do not think off-shoring is causing commercial real-estate problems... adding to them? maybe. This is a lot bigger than one item.

I think commercial real-estate is a lagging indicator and this market (not real-estate) correction will be sharp, quick, and painful.

Overall, I would not be a long-term investor in commercial real-estate here, obviously a lot more pain to come. Just like hiring after the last downturn, I do not see commercial real-estate snapping back.

Toronto Realtor said...

Well, commercial real estate is a risky way to invest money but when you succeed it really pays off, there are a lot of signs saying the commercial real estate will come back any time soon and another bunch of them saying the exact opposite. The only thing left here is to wait and see what happens and trust your instincts.

Take care, Elli

market folly said...

right with you on this and waiting for some excellent short opportunities to firm up. I've been doing a lot of work on the individual REITs to find the fundamentally weakest in terms of being overleveraged or development problems. Then, as always, to the charts to see which ones are closest to a prime short entry.

Have contemplated just using IYR as you have as well, seeing how so many of these REITs are just popping up with equity offerings and hosing the shorts. using the index definitely takes away a lot of this risk.

Anonymous said...

How did you short IYR? Who's your broker? My broker has never let me short an ETF. I'd short the double leveraged short ETFs infinitely, if I could.

Bill Luby said...

Regarding shorting ETFs, the two brokers I use most frequently are TD Ameritrade and thinkorswim. They are happy to let me short ETFs, as well as leveraged (2x/-2x/3x/-3x) ETFs, as long as they are available to short.

Perhaps it's time you auditioned some new brokers. FWLIW, I use 9 different brokers and each one brings something different to the table.



Condo Makati said...

Base on the chart, this is very alarming for the investors. Investing in a real estate is a very risky thing. That is why only the great and wise business men succeeded in this kind of investments.

boracay island Philippines said...

Real estate is a very risky thing indeed. I don’t really consider investing in a real estate right now there’s too much risk to handle.

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