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Op-Ed: Commercial Real Estate's Rebound Still Years Away


Don't be fooled by the performance chase.

Editor's Note: This piece is by Adam Heine, of Camden Securities Company.

Following 14 years of working on Wall Street as an equity trader, I made the jump 6 months ago from the frying pan into the fire, and joined my long-established family business. At its core, it's a commercial real estate owner/manager specializing in retail strip centers, along with other investments in both private and public securities.

What an amazing wake-up call the past 6 months have been with respect to the prior 14 years. When one begins a career on Wall Street trading and managing assets, you have faith that the system works on underlying business fundamentals and correlating valuation guidelines as a means to make educated investment decisions.

However, as time progresses, you realize the reality: The public market is truly a supply/demand mechanism, with fundamentals brought into the equation as a means to support or negate investment views.

After having spent 6 months trying to get financing for quality properties with strong-credit tenants, I now realize firsthand how important the banks are to the lifeblood of Main Street - and especially the world of commercial real estate. The sell-off of 2008 -- when the banks stopped trusting each other, and thus stopped lending -- has laid the groundwork for what will be an extremely difficult 2009, 2010 and probably 2011.

I have been informed in multiple instances over the past month that in the next 12-24 months, there will be $200-300 billion of refinancing needs, with only $50 billion of available funds to service those needs.

Clearly, the REITs, which have recently accessed the public markets through new issuance, are raising equity to reduce debt. (Just yesterday, Professor Fil Zucchi discussed the outlook for 3 of the highest-quality REITs -- Vornado (VNO), Boston Properties (BXP), and Simon Property Group (SPG) -- in Commercial Real Estate: Comfort for the Bears.)

The only way to work through this dilemma is to continue debt for equity swaps. The world needs to become familiar and comfortable with 50% LTV versus 80-90% LTV.

Along with the imminent refi needs, we have a handcuffed consumer. Consumer debt loads remain high. Charge-off rates continue to increase, and lenders of both credit cards and helocs are cutting the amounts provided on those lines.

So what does this lead to? Keep it simple, stupid. Retail companies will continue to keep inventories as lean as possible, to further implement cost-cutting measures (especially rents), and will ultimately fight for survival. Landlords have no way to stabilize rents as they continue to decrease from national chains demanding lower rents and mom and pops asking for temporary abatements.

The recent stock market rally off the March low began when the banks started saying that their traditional business of lending had turned around and was performing fantastically. An upwardly sloping yield curve certainly helps their cause. But let's keep this all in perspective. Refinancing is predominantly going toward residential lending, because the government is forcing it that direction. Then the rally in the banks morphed into retail on speculation that the consumer will have better terms and thus be able to spend again.

Nonsense. The supply-demand mechanism, coupled with technical exhaustion, kicked in. Such dramatic cash levels had been raised from forced de-leveraging and absolute fear of financial Armageddon that the market place paused and reversed sharply. Sellers became exhausted and quickly short covering coupled with performance chasing kick into late March and April.

The only certainty is that the inflation trade is starting to take effect. Commodities are beginning to move higher again. Partially due to re-risking, but also because the governments of the world are pumping massive amounts of stimulus into the system.

Don't be fooled by the performance chase, as those people are, in general, suckers. Main Street will suffer for a while until a lot more of the de-leveraging by the consumer and the commercial real estate marketplace occurs. Save your cash for some future great real property investments. Quality properties bought from distressed sellers.
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No positions in stocks mentioned.

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