The Brewing Trouble
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In fact, since its peak in the third quarter of 2007, household wealth has decreased by 21.6%, or more than a fifth, which is the most dramatic fall in the series since reporting began more than 50 years ago.
Yet, the bulls somehow keep pounding the table that there is light at the end of the tunnel even though consumer spending is over 70% of U.S. GDP.
Now how anyone could possibly think that the consumer is coming off the mat given that type of wealth destruction is beyond me. And, if they don't, how in the world can commercial property values increase?
Instead, I'm firmly in the camp that a "new normal" has begun and it's based more upon frugality than frivolity.
That's because as unemployment surges, home prices continue to drop, and more wealth evaporates, consumers are more likely to slam their wallets shut rather than open them. As a result, without an up tick in jobs and income, another debt-financed binge like the one we just lived through is as likely a blizzard on the 4th of July in Key West. It simply isn't going to happen.
Or for that matter it can't be re-created either. The massive demand pulled forward by all of that cheap money can really only happen once. So what we're essentially left with is a classic case of overcapacity.
We have too many cars. We have too many houses. And we have too many places to buy $5 cups of coffee. The list is endless. And, the endless list contains millions of square feet of mall space with decreasing commercial property values.
What we don't have-or what we have a lot less of-are people that can sustain it all. Sure, money exists, but it has dreadfully little velocity when the game turns frugal. That has the result of turning our consumption-driven culture on its top leaving household names staring down the butt of bankruptcy. And trust me when I tell you it is going to get worse before it gets improved.
All along the way, though, so many things that we accepted as "absolute givens" are going to be stressed to the breaking point.
One of them is the Mall--that icon of American consumption itself. That's because on April 16, 2009, "The Mall" as we knew it began to come crashing downward.
That was the day that Chicago-based General Growth Properties (GGP) - the second-largest mall owner in the United States - filed for bankruptcy in federal court.
In fact, I think that sooner or later we will look back on it and see that this bankruptcy was the just start of what will ultimately turn out to be the great commercial real estate breakdown of 2009 and beyond.
After all, GGP's bankruptcy filing was simply the tip of the iceberg. With more than $530 billion in commercial mortgages pending due in the months ahead, we could be facing another real estate collapse as hazardous as the one in housing.
In fact, here's what the Wall Street Journal had to say in the repercussion of the GGP bankruptcy filing:
"The (GGP) bankruptcy will have far-reaching implications for the mall business, including putting weight on already declining assets values of U.S. malls, and subsequently mall mortgages.
"The collapse points to an underlying concern for the commercial real estate industry, too. Developers and property owners that loaded up on debt during the past real-estate boom now face mountains of that debt coming due. But some of those borrowers, like General Growth, lack the cash or the borrowing capacity to refinance or pay those debts." In short, it is a complete re-run of what just happened in residential real estate, but this time it's commercial real estate. The only difference in this case is the timing which shouldn't surprise anyone.
After all, commercial real estate typically lags what is going on in residential by about 18 months.
And 18 months ago, Freddie Mac and Fannie Mae were trading over $30. Today they are wards of the state.
Again, the fall of residential property vales precedes commercial property vales decline.
That leaves us with commercial property value and the commercial real estate market that has much farther fall
.Here's why.
At this very moment, there are critical elements to this crisis - and they're all bad news.
Commercial property values are in a free-fall - In fact, according to the Wall Street Journal, four years worth of gains in value have been wiped out since the beginning of 2008. And it's possible that property values could fall by as much as 50% from their peak when all is said and done. When that happens the fall cannot be stopped.
Return to Financial Markets From Commercial Property Values
Advance to Dr. Doom
