Monday, July 10, 2006

A Look At Commercial RE

From the Wall Street Journal:

Commercial Real Estate Maintains Its Strength Despite a Cooling Housing Market

With America's housing market clearly cooling, will commercial real estate start to swoon?

Hardly. The national office market, which cratered after the tech bust in 2000, has recovered and is the strongest it has been in five years. The shopping-mall market has stayed strong because consumer spending held up better than expected. And hotels had their most profitable year ever in 2005, partly because of strong business travel.

In fact, the commercial markets benefited from the former froth in the residential-property market because the boom in residential construction limited the amount of land that could be used for other purposes. In some markets, the conversion of apartments, hotels and, to a lesser extent, office buildings, into condominiums reduced the risk of oversupply -- one of the biggest hazards in commercial real estate and one that contributed to the sector's crash in the late 1980s.

Despite the widely varying types of commercial properties -- and the fact they are partly driven by different factors -- it isn't uncommon for people to assume if houses aren't selling, commercial markets must be at risk, too. So common that the faulty assumption itself could be self-fulfilling, says Robert White Jr., president of Real Capital Analytics, a New York-based real-estate information firm. "I so worry...that if they get burned on their condo in Miami, they are going to stay away from any other commercial real-estate investments for the next decade. Those markets are completely different."
...
Yet, with generally improving fundamentals such as reduced vacancy and higher rents and few worries about overbuilding in most markets, the office sector should continue to improve in the near term, if job growth doesn't take a dive. "We're still in that race between increasing interest rates and increasing fundamentals," Stephen Blank, senior resident fellow of finance with the Urban Land Institute, says of the commercial market. "It appears to me that we are going to skate through this."

35 Comments:

Blogger InvestorDavid said...

Commercial real estate did not "enjoy" the bubble like residental real estate.

I believe commercial market will not be affected by bubble popping of residental.

7/10/2006 07:42:00 AM  
Anonymous Anonymous said...

Didn't commercial RE bubble in the mid 90's? They over built on spec as I recall. I believe it preceded the tech bubble.

7/10/2006 08:22:00 AM  
Anonymous Anonymous said...

I think investordavid has a valid point.
and the reason why he is correct, is because this job ralley over the past few years was just in housing. (ok, home depot and Lowes benefited too). But, it would be interesting to see some raw data. Perhaps someone here has that data?

I saw the NYT reported yesterday that commercial real estate rentals are up from last year. Meaning more buisness are opening up and renting spaces. I would love to see the area that they count in the study. Because when I walk around nyc, I see alot of vacant places up for rent. Only place that seem to be doing good is Times Square area, thank god for tourism. Not sure about downtown, but last time I was there, a few months ago, nothing was really new.

Any input?

SAS

7/10/2006 08:37:00 AM  
Blogger skep-tic said...

my firm's office rent went up by 10% this year. but seems to me that strong demand for office space is premised on strong job growth

7/10/2006 09:14:00 AM  
Anonymous Anonymous said...

Inflation number from the FEDS seems awefully low, everything around us has increased in price, gas, grocery, resturants..

That is a risk for people who wanted to hold cash and sit out the bubble.

Any thoughts?

7/10/2006 09:34:00 AM  
Blogger skep-tic said...

not an expert in this, but seems to me that if dollar is losing value, foreign currencies might be a solution. you can buy foreign currency CDs from everbank.com

7/10/2006 09:53:00 AM  
Anonymous UnRealtor said...

All I know is I'm loving my interest income each month.

hsbcdirect.com now at over 5% for a fully liquid account.

7/10/2006 10:39:00 AM  
Anonymous UnRealtor said...

In fact, with interest income finally at decent levels, this will also weigh against sellers as one more reason not to drop a downpayment into a debt sinkhole (house).

It certainly makes me think twice.

7/10/2006 10:42:00 AM  
Blogger InvestorDavid said...

unrealtor,

There are some smaller banks which give better than 5% on CD.

I got much better than 5% on my CD without penalty for early drawings.

You have to deal with the higher ups in the bank directly.

of course, the deposit has to be substentailly higher than $100K.

7/10/2006 10:53:00 AM  
Blogger chicagofinance said...

skep-tic said...
not an expert in this, but seems to me that if dollar is losing value, foreign currencies might be a solution. you can buy foreign currency CDs from everbank.com
7/10/2006 10:53:40 AM

Recognize the risks you are taking.

If your liabilities are USD denominated, then cross currency exposure isn't neccesarily the best place to be taking incremental risk.

Yes, there is strong evidence that the USD should sell off, but you are better off mixing that view into a broad portfolio of international stocks that are held in an appropriate allocation of a larger portfolio.

chicago

7/10/2006 11:43:00 AM  
Anonymous UnRealtor said...

Thanks for the tip David.

7/10/2006 12:51:00 PM  
Anonymous Anonymous said...

investor David,
Are these smaller banks safe? We are going to deposit in HSBC. they give a little over 5 %
Can you tell us the bank and do you just go to the bank and ask to speak to how high up?

7/10/2006 01:29:00 PM  
Blogger Richie said...

EmigrantDirect Offers 5% on their American Dream savings account.

FDIC Insured to $100k, so you can open a joint and single account for $200k insured (you can put as much as you want in these accounts, but the deposit is only insured to $100k).

No minimums, easy transfers (link to an existing checking account) and 24 hour access to your account online.

Emigrant has been upping their interest rates for savings very frequently lately.

-Richie

7/10/2006 01:48:00 PM  
Blogger skep-tic said...

chicago,

does your view change if your investing horizon is more short term (3-5 yrs)?

thanks

7/10/2006 01:50:00 PM  
Blogger Grim Ghost said...

I use HSBC Direct and I'm thinking of using Citibank Direct. An advtange over Emigrant Direct is that they have far more ATM branches in NYC.

As for Commercial RE, I haven't followed it in great detail, but it seems to me that I have heard about Commercial RE prices running up as well.

7/10/2006 01:57:00 PM  
Anonymous Anonymous said...

Any comments on First Horizon Direct CDs? Never used them.
http://tinyurl.com/ft9jh

Also, I see Countrywide has 5.25% for $50k min.

7/10/2006 02:11:00 PM  
Blogger NJGal said...

I just joined HSBC, my second on line account (I have ING but don't want to hold more than the FDIC insured amount - I am happy with ING though)

So, is HSBC ok? They're offering 5.05% now, pretty high,although everyone else seems to be at 5%, which is essentially the same thing. But they're pretty safe right? They also offered a debit card with it, which I thought was good, b/c we can then use that account for large purchases that we've saved for, without having to move the money from ING to checking, etc.

7/10/2006 02:16:00 PM  
Blogger chicagofinance said...

skep-tic said...
chicago,
does your view change if your investing horizon is more short term (3-5 yrs)?
thanks
7/10/2006 02:50:31 PM

Yes - large cross-currency exposure in pure cash is inappropriate for what should be a relatively less volatile portfolio.

I would carry at least 20% of portfolio in USD cash given these luscious rates [ensuring you receive at least 4.5%+], and another 20-30% in mid-term USD fixed income. Ladder it, don't use mutual funds.

The rest in large cap value equities both U.S. and Int'l.

no BRIC / limit on Growth stocks

Believe it or not, I am not an index fan, because I think that Indexing ONLY for the S&P 500 makes sense [active management outperforms elsewhere / too much arb activity], and I prefer an equal-weighted index versus the market-cap-weighted S&P 500 Index. So in a sense, it trashes the enitre concept for me.

I think Bogle/Siegel etc. have too much ego/money invested in the concept to be trusted. I prefer Fama/French [of course] and their belief that the CAPM is loosely applicable, but has many holes. However, it is the best thing out there.

chicago

7/10/2006 02:26:00 PM  
Blogger Grim Ghost said...

Njgal, HSBC Direct is FDIC insured.

And HSBC is one of the 5 largest banks in the world, as large as Citibank and bigger than Ing. If HSBC is not safe, then nothing is.

I also have a large chunk of cash in Vanguard's NJ money market fund. THe current yield is 3.59%. At a federal tax rate of 35% (and a state tax rate as well), that amounts to over 6% tax equivalent for my bracket).

However, money market funds (especially one state ones) are not as safe as FDIC insured funds, although they are pretty safe too.,

7/10/2006 02:55:00 PM  
Blogger Grim Ghost said...

On index funds, I like the Vanguard Total Stock Market Index which uses the WIlshire 5000. For foreign investments, I use the Vanguard Total International Stock Market Index fund.

While I do put money in other funds and stocks, I really do not expect most of them to beat the index funds consistently. The one exception is emerging markets stocks. I hold several investments in Indian stocks, but I can do so directly without using funds

7/10/2006 03:02:00 PM  
Blogger NJGal said...

Thanks. I'm not financially sophisticated like some of you, so it's savings and stocks for me right now (stocks being left from grandma). I don't know what else I would do with the cash, since I really need it to be liquid (killing CDs for now, at least).

I wish I understood all this stuff! But there's a reason I wasn't a business major:)

7/10/2006 03:22:00 PM  
Anonymous Anonymous said...

What happens if some hacker withdraws from your online account, you're screwed right?

7/10/2006 03:45:00 PM  
Blogger InvestorDavid said...

This comment has been removed by a blog administrator.

7/10/2006 03:48:00 PM  
Blogger InvestorDavid said...

anon @ 2:29 pm,

I can't tell you which bank as the bank officials don't want me to tell others about it since it might infuriates other customers.

But try smaller NJ Banks, Asian (Chinese or Korean or Japanese) Banks and Jewish Banks. Most of these banks, branch managers usually have some "power" to change the rate on CD's, not like typical American or European Banks.

7/10/2006 03:51:00 PM  
Blogger InvestorDavid said...

anon @ 4:45 pm,

No.

Then the bank hires someone like me to recover the money. I was involved in several cases similar to what you are saying.

But, they were not for little money. Some cases were in the hundreds of millions.

7/10/2006 03:54:00 PM  
Anonymous Anonymous said...

Investordavid, so if someone withdraws $50,000 from an account, they'll have to rely on someone 'recovering' that money? (Sounds like the chance of recovery is sketchy at best, especially for a "small" amount.)

7/10/2006 04:01:00 PM  
Blogger Grim Ghost said...


What happens if some hacker withdraws from your online account, you're screwed right?


Practically every bank account (except with very small banks), brokerage account, mutual fund account, credit card account etc. provides online access these days. Not to mention health care providers.

Are you going to withdraw from all of those because you're concerned about someone hacking your accounts?

The threat for an online account is no more than for a regular account.

HSBC in particular seems to have very strict security rules.

7/10/2006 04:34:00 PM  
Blogger chicagofinance said...

Grim Ghost said...
On index funds, I like the Vanguard Total Stock Market Index which uses the WIlshire 5000. For foreign investments, I use the Vanguard Total International Stock Market Index fund.
7/10/2006 04:02:57 PM

gg:

You should review some of the studies about index funds.

In short - you are devoting a disproportionate amount of money to crap companies, also there is a significant amount of manipulation inherent in the securities that are less liquid [small-mid caps].

There are a fair number of market participants that are siphoning off value [arb-ing on the reconstitution of indeces that occur from time to time].

Finally, too many people are indexing now. Whenever the crowd follows a particular strategy, it tends to eliminate its advantage.

In this case, market participants purchasing securities that are closer to the index weights are tacitly overallocating the crap companies and underallocating the better companies. What you probably find theoretically [I don't have data to prove it] is that crap companies on the margin are more highly priced that they would be otherwise, without the demand for the stock generated by indexing.

Just my opinion.

chicago

7/10/2006 04:37:00 PM  
Blogger chicagofinance said...

This comment has been removed by a blog administrator.

7/10/2006 04:40:00 PM  
Blogger chicagofinance said...

"Finally, too many people are indexing now. Whenever the crowd follows a particular strategy, it tends to eliminate its advantage."

FYI - do you remember the Google mini-underwriting of stock for liquidity in advance of it's addition to the S&P 500. This was a blunt force method for trying to eliminate/burn the arb trade
out of the market.

7/10/2006 04:41:00 PM  
Anonymous Anonymous said...

"Are you going to withdraw from all of those because you're concerned about someone hacking your accounts?"

Haven't signed up for any of those, because of security concerns. The only motivator to sign up for online banks, for me, is the higher interest rate they pay.

7/10/2006 06:26:00 PM  
Blogger Grim Ghost said...


Haven't signed up for any of those, because of security concerns.


But the fact is that they do provide that capability, so if you're concerned about a breach, someone could well breach your offline account as well via hacking into the banks web site.

7/10/2006 07:01:00 PM  
Anonymous Anonymous said...

You can't live in a bank account last time I looked. You can always rent someone else's property, hopefully you like the neighborhood and the decor.

7/10/2006 07:14:00 PM  
Blogger Grim Ghost said...

CF

I'm not an EMT or index funds fanatic (no more than 30-40% of my mutual stock fund portfolio is indexed), but I do believe the advantages of indexing is high for the most part.

As far as arbitrage goes its not really an issue for the Wilshire 5000, and as for too many people indexing, I remember reading somewhere that the % of indexed funds in the US market is only slightly higher than it was 10 years back. Individually owned funds may have chosen to index more, but institutional money has dropped as a %.

Non indexed funds are also fine though as long as they're low cost, low turnover etc. I also like the idea of getting a couple of funds that try more unusual strategies.

Thanks for your comments, but we'll just have to disagree on what role index funds should play in your portfolio.

7/10/2006 07:36:00 PM  
Anonymous Anonymous said...

Good dialogue boys.

Here is my tip. Only if you have a net worth of a million dollars or more should you be considering foreign currency. If not worth under a million. Don't go there.

Just my 1 and 1/2 cents.

SAS

7/10/2006 07:49:00 PM  

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