More Thoughts on Commercial Real Estate

The WSJ Property Report provides yet more evidence that the commercial real estate slump is only just beginning. The article highlights four speculative office buildings currently under construction in the Buckhead neighborhood of Atlanta, two of which are financed by Bank of America. Additionally, 35 recent condominium projects will add to a 40 year supply of condos in Atlanta at the current sales pace. Finally, a $600 million outdoor shopping mall under construction has suspended construction to save money. While suspending construction is a fabulously creative way to cut costs on a construction project, it doesn’t leave the developer with much with much of an exit strategy in terms of repaying the construction loan. Half-built construction sites are not very good generators of revenue.

The irrational construction boom is not unique to Atlanta, of course, as the current landscape of most major US cities is littered with shiny new office and condo towers eagerly awaiting occupants. Even without a steep economic downturn, the level of easily financed commercial development over the boom years was insanity. How could a 40-year supply of condos make sense to anyone? Blame has already been heaped upon the foolish lenders and debt-addicted real estate developers that seemed to care little about whether the market could handle such a crushing supply of new properties. It’s been particularly fun on my part to poke fun at all the high-profile real estate developers who have ridden the crazy roller coaster of boom-to-bust twice. If you blew out in late 80’s and you’re blowing out again now, you can’t blame the “unexpected credit crisis.” You’re just a boob who got lucky twice but only possesses the information retention and reasoning ability of a two-year-old.

There is one more group of people left to blame for those in the credit-crisis-finger-pointing business; city planners. After all, city planners are responsible for approving construction projects, rezoning where appropriate and determining the future shape of a city’s skyline. It appears as if the city planning departments in most major cities were in the business of rubber-stamping any project that landed on their desks. Consequently, the shape of nearly every major American city skyline is filled with a bunch of new nearly-empty buildings. With $248 billion in commercial real estate debt coming due this year and another $566 billion in 2010 and 2011 (according to Foresight Analytics LLC,) it’s hard to imagine that this can end in any way other than with lender ordered mass scale liquidations of defaulted properties. This is precisely why the recent worst-is-over bullishness on REITs and bank stocks confounds me. TALF, TARP, PPIP? None of these programs can change the fundamental imbalance between supply and demand.