Commericial Real Estate Slowdown is Coming

Commercial Real Estate I think will be the S&P 500 of the homebuilding bubble. Housing stocks went down 80% (the NASDAQ) and Commercial REITS (and other commercially centered companies) will go down 50% (The S&P). It never plays out the same but I think it is safe to say commercial real estate is entering the normal time in the cycle where they are about to get walloped and the risky stuff that went on as documented below will make it feel very painful for equity holders.

http://www.nytimes.com/2007/11/07/realestate/commercial/07kushner.html?_r=1&oref=slogin

The record price paid in January for the 41-story aluminum-clad office tower at 666 Fifth Avenue — $1.8 billion — was breathtaking.....

and

Today, however, some real estate specialists regard the 666 Fifth Avenue transaction as a textbook example of the risky practices that were prevalent before the current credit squeeze, when many loans were based not on the actual cash flow of the building from existing rents but rather on optimistic projections of what the space might command once those leases expired.....

and

What raised eyebrows was the financing of 666 Fifth and other buildings sold late last year and early this year, said Robert M. White Jr., the president of Real Capital Analytics, a New York research firm.

A group of lenders led by the real estate unit of Barclays Capital agreed to provide an interest-only first mortgage of $1.215 billion based on an annual cash flow of $114 million, or 1.5 times the debt service, according to a document filed with the Securities and Exchange Commission. But a footnote pointed out that the cash flow from existing rents would actually cover only 0.65 percent of the debt service. ... the building’s shortfall amounts to $5 million a month. A $100 million reserve fund was included in the debt package to cover the shortfall.