Commercial Real Estate Is NOT the Next “Shoe 2 Drop”

Shack-A-Stories – Unworthy

Commercial Real Estate Is NOT the Next “Shoe 2 Drop”

Will there be losses? Yes. Will reserves/provisions increase? Of course. But commercial real estate will not explode. And, neither will the institutions that own the commercial real estate.

Consider two major contributing factors: 1) Modifications and 2) Corporate Earnings.

1. Modified Loans – Financial institutions (read banks) are modifying home loans to help home “owners” meet monthly mortgage obligations. They are extending terms, writing down portions of loans and making other modifications. They are doing this to maintain asset values on their books and ensure at least some level of cash flow (read rent).

Do we think real estate owners/lenders will not do the same thing for corporations? Really?! Because to believe that commercial real estate will explode or be the next “shoe 2 drop”, you have to believe real estate owners/lenders would rather burn these buildings to the ground than decrease cash flow for 2 or 3 years. Seriously? Is Napoleon on the way? Are we Russian? Is it time to burn baby burn?

Certain institutions will not being able to modify, sell or sustain reduced rents. Will this contribute to failures? Yes. It will contribute, but you would have to believe that people who have focused entire careers on cash flows will absolutely do nothing to help their own cause.

By the way, office, retail and industrial REITs are up around 80% since March 2009.

2. Corporation Earnings – Have these people looked at earnings this year? Because everyone had earnings…and they beat estimates! Okay, maybe not everyone beat, but you get our point. Earnings exist and earnings are increasing. Have these people not looked at the stock market? Corporate bond yields?

Corporations are still earning money. Earnings mean cash flow. Cash flow means corporations can pay their bills…including rent. It’s tricky, I know. Corporations may not expand, may try to reduce space, but close their doors and default…no.

We may not be a 100% correct in our call; however, we still will win. Why? Because every talking head out there, and not the good musical Talking Heads, are standing together on the other side of the Teeter Totter. So even if we are wrong and the talking heads put their money where their month is and to short commercial real estate or institutions with high exposure to commercial real estate they will all be on the same side of the trade. Buenas suerte amigos!

P.S. Does some investor out there think there is a group of financial institutions that are only holding brand baby-spanking new or partially completed projects? Really?! Because our bet is that their portfolios include completed projects, old buildings and the like that are producing cash flow. And, if they have to sell they may have an accounting loss but will still receive cash.