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Minyan Mailbag: Is Commercial Real Estate Next?

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Commercial real estate market , like the LBO market, like the stock market is still in the "decoupled" mindset...

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Editors Note: The following is a question posed to Minyan Peter - the author of such articles as: The E*Trade Trade, The Treasury's Speed Bumps, and Credit Cycle Bottoms.


Peter,

I've seen a fair amount of debate about whether or not Commercial Real Estate is the 'next shoe' based on the evidence that CMBS spreads are widening and with a potential recession, corporate borrowers are going to become worse credits.

Most of the CRE bearishness is of the blogging/doom-and-gloom nature, I thought maybe you could provide a bit more of an analytic approach based on the structural similarities and differences of the two markets.

Thanks
Minyan James



James,

While I am not at all an expert on Commercial Real Estate, I have to believe that it too will be hit badly by the credit crisis for one simple reason - asset deflation. As you probably have read, I am clearly in the asset deflation camp - which I see as the simple consequence of a higher cost of capital coming from a return to risk premia by credit investors.

Having said that, I think that commercial real estate market , like the LBO market, like the stock market is still in the "decoupled" mindset - where corporate earnings can grow despite a slowdown in consumer spending. Like this current stock market rally, denial is a hard thing to fight. But I would argue (am arguing) that we are either in or will shortly be in recession and with it will come further asset deflation. And this time the corporate world will be hit. When that happens, I believe we will move from denial to panic. Then watch out.

So yes I think you are spot on with commercial real estate. Whether anyone will listen...?

- Minyan Peter
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