Commercial real estate is in a structural cliff-dive, currently in slow-motion but soon to gather momentum.
With all the hub-bub about the foreclosure crisis in residential real estate, commercial real estate (CRE) has fallen off the radar screen of crises. Don’t worry, it’s still careening off the cliff; the fall is just in slow motion.
No need for a fancy report to see the signs of decay in CRE. Signs of the ongoing CRE meltdown are everywhere--empty storefronts, mall shops and vacant office complexes abound.
The causes are all too familiar: lending standards went out the window, banks loaned too much, buyers paid too much, lousy deals were avidly securitized, cash flow projections entered Fantasyland and unhealthy speculation fed widespread fraud.
Since boom-and-bust cycles of overbuilding and retrenchment are endemic to commercial real estate, it’s tempting to view this as just another post-expansion trough. Since prices have already slipped a staggering 40% from the 2006 peak, those calling this the bottom of the current cycle have some history on their side.
But beneath what appears to be a standard-issue retrenchment--a glut of inventory to work through, lenders avoiding risk instead of embracing it, and so on--structural changes in the U.S. economy are changing the CRE landscape for good--and not in a positive direction.
A long-term structural decline in CRE is not just a real estate industry concern. With some $1.7 trillion in CRE loans needing to be refinanced in the next few years, a continuing decline in CRE values could push the still-fragile banking system into a new crisis and the economy back into recession as early as next year.
The extremes reached in the boom were certainly epic: investors paid $800,000 per resort hotel room and over $500 per square foot for Class A office space, numbers which no terrestrial cash flow could possibly justify. Retail centers sprouted alongside every new exurb subdivision.
By this logic, an unprecedented boom requires an equally unprecedented bust to work through the excesses in price, debt and risk. So far so good, but there is an anecdotal body of evidence which suggests that profound systemic changes are taking place in the U.S. economy which will structurally reduce the demand for commercial real estate--not for a few years, but permanently.
A bargain frenzy since the global financial crisis has led consumers to expect and accept only slashed prices.
The dire forecast, from market research company TNS director Chris Kirby, comes as bored staff in some stores are put to work cleaning, tidying and changing window displays because of a lack of customers.
At some sites, especially fashion outlets, stock is discounted by up to 70 per cent as soon as it hits shelves to attract shopper interest.
"Consumers are no longer willing to accept the first price they find. They know there’s a good chance of finding it cheaper somewhere else," Mr Kirby said. "In essence the industry is training us to become professional, if not predatory, consumers."
The caution came as a Commonwealth Bank economic index that tracks credit and debit card transaction value trends across a wide range of industries reported the weakest spending since the height of the global financial crisis in early 2008.
One retail organisation, the United Retail Federation, said the slump was at its worst in Queensland, where small retailers were struggling to move stock, even after heavily discounting items.
The bleak picture is at odds with scenes of hundreds of shoppers queuing at lay-by counters to take advantage of major toy sales.
Thousands of bargain hunters queued at Big W stores for the start of its two-week toy sale, which ended last week.
One Gold Coast shopper complained of a four-hour wait at her local Big W store, and of being hit in the ankles with shopping trolleys in the stampede.
Target will follow with its toy sale from July 22 to August 4, having already released its 72-page catalogue offering 120 half-price bargains.
But Australian Retailers Association director Russell Zimmerman said retailers generally were finding it difficult to clear stock, even at hefty discounts. "It’s tough out there and retailers are finding it harder
Retail stocks continue to hit new 52 week highs just about every day. As we noted last week, the discrepancy between the retail stocks and reality appears to be growing with every uptick. Citi recently issued a note expressing the same belief:
“The S&P 500 Consumer Discretionary sector’s Retailing industry group looks worrisome. While retailing stocks have been very powerful performers this year, up almost 2x the S&P 500’s gain year to date, there are several reasons to become concerned about the group’s potential trading trends in the next year, ranging from fundamentals, to earnings revision momentum and to valuation. Moreover, potential equity market weakness mid-year could generate meaningful near-term profit-taking as portfolio manager conviction seems shallow. Therefore, a “downgrade watch” alert from Market Weight is appropriate.”
In this morning’s Breakfast With Dave newsletter, analyst David Rosenberg talks last week’s retail sales report.
Don’t believe everything that you read, says Rosie. According to "raw data," retail sales actually FELL1.6% month-over-month in February, and you can’t just blame seasonality for this.
Breakfast With Dave: “It’s always best to look at what consumers do rather than what they think or say. They’re spending — that’s the main thing”. That goes down as the glib remark of the weekend — front page of the Investors Business Daily (Shoppers Perk Up, Lifting Retail Sales, By A Surprise 0.3%). Another pundit said pretty well the same thing in Barron’s and following the data on Friday there was an economist on CNBC who said that you never win by betting against the U.S. consumer.
What a load of you-know-what.
Let’s more closely examine that retail sales report.
First, the raw data actually showed that sales fell 1.6% MoM in February. Now it would be meaningful if February was usually a weak month for sales compared to January so that it would make perfect sense for the seasonal adjustment factor to give the raw data an upward skew. But in fact, retail sales rise over half the time in February. And while, on average, the not seasonally adjusted retail sales data are down 0.4% in each February over the past decade, the reality is that this past February was four times as bad as the norm — not to mention tied for the third worst February since 1998. Really good result, eh?
Second, here we have the greatest stimulus experience in seven decades and retail sales are still down 5% from the pre-recession peak and on a per capital basis are down 8%. Sales are actually lower today than they were in January 2006 — four years ago — even though the population has risen 4.3% over this time. And on a per capita basis, retail sales are no…
Disappointing news on the consumer front, courtesy of the latest charge-off numbers:
WSJ: The rate of charge-offs on U.S. credit cards rose more than a half-percentage point in November, snapping a two-month run of drops from an all-time high in August, and delinquencies rose for the fourth consecutive month, Moody’s Investors Service said.
Charge-offs, which are those loans a credit-card company doesn’t think it will be able to collect, were 10.6% for November, compared with 10% in October. The ratings firm also said the delinquency rate, which gives a glimpse of issuers’ potential losses and how much they may need to set aside in reserves, rose to 6.2% in November.
LA Times: As credit lines have shrunk and consumers have cut back on spending, thousands of small businesses have closed their doors over the last year. The plight of struggling firms has been aggravated by the reluctance of banks to lend money, said Brian Headd, an economist at the Small Business Administration’s office of advocacy.
California has been particularly hard hit. The latest data show small-business bankruptcies up 81% in the state for the 12 months ended Sept. 30, compared with the previous year. Filings nationwide were up 44%, according to the credit analysis firm Equifax Inc.
Shown below is a retail proxy, the Retail HLDRs Exchange Traded Fund (RTH). It’s outperformed the S&P500 on a three month basis. Yet Best Buy’s (BBY) warning today, that revenue will be driven by lower-ticket items in the fourth quarter, could mean that the pre-Christmas retail rally shown below is toast.
Note how Best Buy dropped a nasty 7% on just these decent earnings. A lot of holiday cheer is already priced-in.
In a sign that the new normal in consumer spending continues unabated, upper-income Americans’ self-reported average daily spending in stores, restaurants, gas stations, and online fell 14% in November, reverting to its relatively tight ($107 to $121) pre-October 2009 average monthly range. Middle- and lower-income consumer discretionary spending increased by 7% last month but remained in its tight 2009 average monthly range of $52 to $61. Still, consumer spending by both income groups continues to trail year-ago levels by 20%, even as those comparables have gotten easier to match — possibly dashing hopes that upscale retailers and big-ticket-item sales will do better this year.
[click on charts to enlarge]
Spending By Income Level
Spending vs. Year Ago
The hope was that the surge on Wall Street and the seeming stabilization of housing values had encouraged some upper-income consumers to abandon the 2009 spending new normal. November’s results dashed these hopes, as upper-income consumers joined their middle- and lower-income counterparts in spending 20% less than they had during the financial crisis days of 2008 and returning to the relatively tight 2009 daily spending range for this group prior to October.
Spending New Normal
The year-over-year differences have declined somewhat during recent months, but much of this closure in the 2008-2009 spending gap is a result of the easier spending comparables from last year’s financial crisis.
On a national level, the spending new normal suggests slower economic growth than otherwise might be expected in the years ahead.
While the spending "new normal" may not be good for the larger economy in the short-term, it may be seen as a strong positive for individual consumer households. Consumers, like their business and banking counterparts, would be well-served to de-leverage by spending less, saving more, reducing their use of credit, and thereby strengthening their personal balance sheets. While this may not provide the immediate-term returns to the economy of the over-leveraging of recent years, a financially stronger U.S. consumer implies only good things for the longer-term
If local media reports are accurate, shoppers have turned out in huge numbers across the country for Black Friday.
We did a survey of local news sites to gather the latest Black Frdiay news. And it looks very good for retailers.
Cincinnati, Ohio: "A long line of shoppers looking for the best priced toys for Christmas waited outside a Western Hills Toys R’ Us store on Glenway Avenue, since late Thursday night to be among the first in line. After the doors opened at 12 a.m., there were some reports that Cincinnati police had to be called to bring order to a disorderly line of shoppers. Some of them said an argument between several groups of shoppers got out of hand and forced the police to called for help…At the new Wal-Mart superstore in Fairfax on Red Bank Road, over a thousand people came early Friday morning, to be in the right line to get some of the doorbuster sales the chain was offering…Many retailers warn that they have severely cut back on what they have ordered."
Weston, Wisconsin: "The line leading to Target in Weston stretched at least three blocks as people got ready for Black Friday shopping Friday."
Framingham, Massachusetts: "Dondrae May, a manager at Best Buy’s Framingham, Mass., store, said shoppers started lining up at 4 p.m. Thursday for the 5 a.m. opening for the limited early morning specials like the $299 32-inch Dynex flat-panel TV.
He noted that crowds were larger than last year and that shoppers were filling their basket with more items than a year ago, when they were shellshocked following the ballooning of the financial meltdown. The biggest draws were laptops, TVs and GPS systems, he said."
Aurora, Illinois: "Black Friday shoppers got an early start this year, causing a 2-mile traffic back-up near Chicago Premium Outlets in Aurora…Starting about 11 p.m. Thursday, cars began lining up to get into the mall, according to Illinois State Police…The mall opened at midnight, and the heavy traffic remained for several hours, State Police said."
Can you have a bear market for stocks without an accompanying recession? It’s not terribly common, but it does occur from time to time. Burt White, Chief Investment Officer at LPL, names three reasons why it’s happened in the past: Policy mistake (raising rates in 1976), financial crisis (Asian currency mess / LTCM blow-up in 1998) or excessive speculation (Crash of 1987).
What’s kind of funny but not so funny is that the bears are alleging all three of these things are occurring right now – policy error by Yellen in raising too soon and Japan for cutting to negative rates, financial cr...
Earlier today, we highlighted the rather abysmal results reported by Maersk, the world’s largest shipping company.
To the extent the conglomerate is a bellwether for global growth and trade, things are looking pretty grim. Maersk Line - the company's golden goose and the world's largest container operator - racked up $182 million in red ink last quarter and the outlook for 2016 isn't pretty either. The company now sees demand for seaborne container transportation rising a meager 1-3% for th...
The dollar nursed losses around three-and-a-half-month lows on Wednesday, pressured by fears of a global economic slowdown following recent falls in oil prices and growing concerns about the health of European banks.
The gap down had set up for a big bearish move lower, but the collapse never appeared. Instead, lows held as support. On the flip side, an attempt at a rally couldn't get off the ground, but markets were able to do enough to register a close above the open.
The S&P closed with a spinning top below support. Watch for a strong 'sell' signal in the MACD as other technicals remain bearish. The only positive is the strong relative performance against the Russell 2000.
The Nasdaq experienced a big gap down yesterday, and today offered a brief move to test the gap. Bulls need a gap higher to leave what could be a very good bullish ...
When assets reach prior highs, its time to pay attention from a Risk On & Risk Off basis.
The chart on the left is Silver, going back to the mid 1970’s. As you can see it reached $50 in the early 1980’s and then quickly reversed, losing over 90% of its value in the next 14-years. Then it embarked on a rally, starting in the early 1990’s. This rally took Silver back to the $50 level in 2011, which ended up being a “Double Top” nearly 30-years later. After hitting the $50 level again, buyers disappeared and sellers stepped forward....
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Throughout the past 30 days of wild volatility, here’s what I didn’t do.
Panic. Worry. Sell.
In fact, the best I did was add to a couple of positions yesterday. The world was already in an uncertain state for the past 3+ years. It’s just that with the market rising, we pushed the issue to the back of our mind and ignored it.
A number of systemic, structural forces are intersecting in 2016. One is the rise of non-state, non-central-bank-issued crypto-currencies.
We all know money is created and distributed by governments and central banks. The reason is simple: control the money and you control everything.
The invention of the blockchain and crypto-currencies such as Bitcoin have opened the door to non-state, non-central-bank currencies--money that is global and independent of any state or central bank, or indeed, any bank, as crypto-currencies are structurally peer-to-peer, meaning they don't require a bank to function: people can exchange crypto-currencies to pay for goods and services without a bank acting as a clearinghouse for all these transactions.
Last year, the S&P 500 large caps closed 2015 essentially flat on a total return basis, while the NASDAQ 100 showed a little better performance at +8.3% and the Russell 2000 small caps fell -5.9%. Overall, stocks disappointed even in the face of modest expectations, especially the small caps as market leadership was mostly limited to a handful of large and mega-cap darlings.
Notably, the full year chart for the S&P 500 looks very much like 2011. It got off to a good start, drifted sideways for...
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Baxter Int. (BAX) is splitting off its BioSciences division into a new company called Baxalta. Shares of Baxalta will be given as a tax-free dividend, in the ratio of one to one, to BAX holders on record on June 17, 2015. That means, if you want to receive the Baxalta dividend, you need to buy the stock this week (on or before June 12).
Back in December, I wrote a post on my blog where I compared the performances of various ETFs related to the oil industry. I was looking for the best possible proxy to match the moves of oil prices if you didn't want to play with futures. At the time, I concluded that for medium term trades, USO and the leveraged ETFs UCO and SCO were the most promising. Longer term, broader ETFs like OIH and XLE might make better investment if oil prices do recover to more profitable prices since ETF linked to futures like USO, UCO and SCO do suffer from decay. It also seemed that DIG and DUG could be promising if OIH could recover as it should with the price of oil, but that they don't make a good proxy for the price of oil itself.
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at email@example.com with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
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