Rick Jones at Crunched Credit has a thoughtful piece where he offers a hopeful picture for commercial real estate debt markets in 2012. I can’t go there.
On several basic points he’s overly optimistic (his view in bold). My view is this:
- Unemployment (6-7%): for the next 3-4 years, the new normal is +8% – with the most important segment of our work force (the young adults) hammered at +16%. Hammering the future workers of America will . . . . ugly thought for old people like me.
- Commercial Real Estate ("firming of demand . . . mostly expand’): demand for and expansion of commercial real estate will firm up only in limited markets, and only for certain products in those markets. For example, the opening of the "new" Panama Canal will result in increased demand for industrial space along the Gulf Coast. But, across the nation, retail will remain a point of pain: tepid consumer spending and significant increase in online purchases will undermine the recovery in "sticks’n bricks" retail. As I’ve noted, the human vulture effect of online shopping will impact the retail footprint, and it will ripple across the entire CREF platform. Next up: office demand will feel a similar squeeze. For example, my law firm will move in 2012 – with more lawyers but into a much smaller leased premises. The technology mantra for office space is "fewer people doing more in LESS SPACE."
- Housing ("housing will finally make a bottom"): its all about moving back the US percentage of home ownership to the more frugal 1960 average of 62% – which will be a significant drop from the ’09 high of @ 67%. It could be a ten year downward trek, which could take us until 2019 for a return to close to the 1960 number. (Part of me begs to be wrong on this one.)
- "EU" feels like "OUch": by some measures, the EU’s economy is the biggest in the world. We’re tied to the EU both through our heritage, and as a major trading partner. This is why the US Treasury periodically supports the EU banks. Rick Jones and I agree on this one. The EU is OUch.
- CMBS comeback ("modestly better"): like Rick, I anticipate an improved CMBS market. Unlike Rick, I pin meaningful improvement for CMBS on the adoption of my "three-step" model:
- risk retention
- loan level transparency
- consistent appraisal & underwriting standards
We’re entering into "tepid" times, which does not equate to "good" news.
Sure, we’ll be innovative and the like.
But . . . we can’t structure our way out of this one.
If you view any of this differently, please comment below.