BOSTON (MarketWatch) -- The problems in U.S. credit markets are beginning to affect nonresidential, commercial construction across the country, according to a survey released Wednesday by the American Institute of Architects. "The apprehension in the industry is based around reports that growing default rates among subprime borrowers in the residential market has made credit more difficult to secure for nonresidential construction projects," said AIA Chief Economist Kermit Baker in a statement. Subprime aftermath ???
........combined with excess capacity, downward pressure on rents, downward pressure on property valuations, increased conservatism on the part of lenders, combined with too many Starbucks, CVS's, bank branches, sandwich joints...........it ain't pretty out there.
US Commercial Real Estate Futures and Options Set to Launch CME Group has announced that S&P/GRA Commercial Real Estate Indices (SPCREX)T futures and options contracts will begin trading October 28. The contracts will enable investors and speculators to protect or gain exposure to the $5.3 trillion U.S. commercial real estate market. Coincidence ??? =>
:eek: It's not a coincidence that new contracts tend to get launched at market peaks after the underlying trend that motivated the creation of the contract has run its course. Same thing with the residential real estate contracts launched ~Feb-2006, also a stock market peak. The commercial contract is nice but I'll bet that it'll be more illiquid than the residential contracts. Again, nobody will really know what the contract is worth which will lead to wide bid-ask spreads and nobody willing to "step out". If the CME has a "dog & pony show" to promote the contract, go for the free food and booze.
I've been saying this is the next shoe to drop for a while now. Commercial RE is way different from residential. A large res builder can better control his market exposure by adjusting inventory (i.e. building fewer spec houses). In commercial that's very hard to do. Once you commit, you can't just build half of a condo building or half of an office tower. Also, by the time a developer sees an opportunity to build an office complex, strip mall, etc...your competition sees the same thing, so you have too many projects coming on at the same time.
So is it time for commercial real estate to feel what residential real estate has felt for the last 18-24 months??
Commercial Real Estate In Europe Takes Hit Share Prices Fall 11% On Mortgage Trouble; Bulls See Opportunity By MIKE FOSTER September 20, 2007 When higher interest rates triggered defaults in U.S. subprime mortgages this year, it didn't take long for commercial real estate to get caught in the fallout. European commercial real-estate share prices fell 11% in the second quarter, leaving them marooned at a discount to the actual real-estate assets that exceeded 20%, according to the S&P/Citigroup Global Property index. The world real-estate index was down 6.6%, helped only by a 2% gain in Asia, but overall morale was poor. Alan Carter, a securities analyst at Citigroup, said: "Hedge funds aggressively shorted the sector starting with the most liquid and moving to the second liners, almost stumbling by accident across redemptions from real-estate equity funds." He is concerned about the likely impact on underlying valuations, adding, "The asset class is highly cost-of-capital sensitive and capital consumptive." Spreads on commercial-backed mortgage securities have trebled to 0.63 percentage point. Five-year swaps -- the benchmark for property borrowing costs -- rose to 6.1% against average U.K. yields of 4.5%. Gone are the days when investors could borrow money to buy property on yields sufficient to service interest charges and make an easy profit on resale. U.K. property yields rose half a percentage point during the summer, agents said. According to data provider IPD, overall real-estate returns fell to 0.2% in July, the lowest increase in 12 years. Total U.S. deals fell in value to $6 billion in the second quarter compared to $29 billion in the first quarter. Dozens of large deals were put on hold in the third quarter, as banks and buyers of mortgage-backed securities sat it out. Lenders have been badly rattled by the way hedge funds sponsored by Bear Stearns Cos., Goldman Sachs Group Inc. and BNP Paribas SA were hit by defaults on subprime mortgages. Banks fearing the risk to their reputation soon became reluctant to lend to each other and cut back on all types of real-estate lending. U.K. mortgage and savings provider HBOS PLC has pulled out of its mooted purchase of listed property developer Quintain. Five real-estate initial public offerings in Europe have been canceled. Royal Bank of Scotland postponed the sale of a £1.1 billion ($2.21 billion) hotel portfolio, not least because it would have had to finance the purchase by Robson Asset Management. Citigroup's Mr. Carter said he believes entrepreneurs will find it hard to finance, or refinance, their deals as yields rise. "There are assets out there that can't be sold at book value for the first time in years," he said. Property bulls, however, argue that leasing conditions in the real-estate sector are excellent. Jack Foster, head of real estate at Franklin Templeton Real Estate Advisers, said the supply of space was tight. "This situation is different to the early 1990s. We are buyers of real-estate stocks, moving from underweight U.K. to just under neutral," he said. Private-equity funds totaling $50 billion, including vehicles sponsored by Blackstone Group and Morgan Stanley, would continue to underpin the market, said Mr. Foster, who added, "There are a lot of investors who will take a view on strong income in the sector, even when they build a rise of yields of 300 basis points [three percentage points] into their calculations." Mark Laurence, investment chief of Rock Capital, said shares in real-estate companies had fallen to such low levels they were at an effective discount to bond yields. Robin Goodchild, head of European strategy for LaSalle Investment Management, said property stocks discounted every conceivable problem during the second quarter. Last month, some share prices bounced back as hedge-fund shorts were squeezed. Overall U.K. rents are on target to keep growing at 3% a year, according to Mr. Goodchild. "If you factor those into prospective yields, you end up with 5.5%, which isn't so far off the cost of borrowing money," he said. "There has been a marked lack of development in this cycle, due to tough planning regimes. There is plenty of demand for new space and, even now, no lack of finance for schemes." The main exception to the rule is the City of London, where a forest of cranes has appeared on the skyline. "The trouble is the supply tap cannot be turned off but demand can," Mr. Carter said. Jon Lekander, chief investment officer of Aberdeen Property Investors, said limited supplies of vacant space elsewhere were bolstering the prospects of real-estate markets in much of western Europe. "Frankfurt and Oslo have greater potential availability, but Helsinki and Stockholm have geographical constraints, which restrict supply." Tony Smedley, head of Europe at fund manager Invista, said: "We are making calls about markets, which have reached the bottom of their rental cycle so as to benefit from upside in future leasing. This may mean we take on short-term market risk to capture such growth." Deutsche Bank's Rreef real-estate arm is more measured in its enthusiasm. In a recent research note, it said Ireland, Spain and the U.K. were close to the peak of their cycle. "Other markets, such as Germany and the Netherlands, will benefit from a delayed rental recovery and a later compression of cap rates such that values will likely continue to appreciate." Rreef said the global property-investment market would grow by 40% over the next five years to $13.7 trillion with the help of valuation increases, developments and leaseback deals.