On February 10, 2010 the Congressional Oversight Panel published a 189-page report on the condition of the U.S. commercial real estate sector. To summarize the document, "Hurricane Kat-REIT-a" has arrived.
To wit: The "levies" that were supposedly in place to keep the flood of mortgage defaults and price declines OUT OF the commercial real estate (CRE) sector have shattered. And the toll of the damage is nothing short of devastating; in short:
A total of $1.4 T-T-Trillion in CRE loans will require refinancing in the next four years, with One-Half of them underwater. Losses from these loan failures could reach $300 billion and threaten the balance sheets of nearly 3,000 mid-to-small sized banks.
In the words of one news source: The "commercial real estate crash...could touch the lives of nearly every American. This report is intended to wave a red flag to the White House and Congress that the CRE market is going to get a lot worse before it gets better." (CNN Money)
NOW they tell us. N-O-W, when commercial real estate values in some metro areas have plummeted by 50%; when real estate investment trusts (REIT) stand more than 60% below their February 2007 peak; and when a full-blown CRE loan crisis threatens the financial future of "nearly every American."
What about then?
THEN -- as in the final peak of the commercial real estate boom circa early 2007. At the time, investment inflows into the sector reached an all-time record, alongside soaring REIT values to similar, never-seen-before heights. And, the only "red flag" the mainstream experts saw waving was at the other end of a nostril-flaring, hoof-stomping, market-charging bull.
Here, the following news items from 2007 take over:
- "A Real Estate Boom That Keeps On Giving." (New York Times)
- "The housing market may be in tough shape but the [commercial] part of the world is doing quite well for itself." (Associated Press)
- "The commercial market has not been dragged down by the residential mortgage mess because for the most part, buyers and sellers are more sophisticated and have more financial flexibility and resources to ride out credit market turmoil. It's a different animal. Anyone expecting to see defaults on these loans will be disappointed." (USA Today)
We all know how that story ends -- the supposedly "different" commercial animal becomes identical to its residential relative. Here, the September 2009 Elliott Wave Theorist offers this compelling visual:
As for the other story -- seeing the CRE crisis long before it arrived -- EWI's team of analysts has been there from the very start with the following archive of analysis:
October 2006 Elliott Wave Financial Forecast (EWFF, for short): "Some say home prices may go down, but commercial real estate is safe. Our forecast includes no such distinction."
December 2006 EWFF: " With prices of REIT indexes extending to new heights, the consensus is that commercial real estate will 'cushion the impact of the housing slump.' But its only a matter of time before every type of property gets pulled into the deflationary spiral."
June 2007 EWFF presented this close-up of the S&P REIT Index that showed a five-wave decline from its February 2007 peak and wrote: "The form suggests that the bull market is over for commercial real estate."
The violent sell-off from there slashed 70%-plus value off of REIT prices before bottoming in 2009.