Commercial Real Estate Trend Accelerates To Downside

By: Mike_Shedlock

The commercial real estate bust is now in full swing as Moody's Commercial Real Estate Scorecard Accelerates To Downside.

The downward spiral in commercial real estate market fundamentals has accelerated as the recession persists, Moody's Investors Service says in its latest Red-Yellow-Green study.

For the first time in six years, none of the seven property types tracked by Moody's has a "green" or strong score, while four of the property types are at levels of weakness unmatched in the almost 10-year history of the study. The two hotel sectors--full service and limited service--continued to post lowest possible scores of 0 during the first quarter, while the industrial sector recorded its all-time worst score as it fell into red territory.

Multifamily deteriorated enough to fall from green into yellow, where it joins the retail and the central business district office sectors. Moody's says that while supply pipelines do continue to dry up across all property types, forecasted demand has similarly dropped, so that demand projections for six of the seven property types worsened during the quarter. In addition, vacancy rates have maintained a steadily increasing trend among all property types (except hotels where they are not measured), and the poor absorption expectations do little to assuage the tide of availability.

Among hotels, year-over-year RevPAR fell below the record lows reached the previous quarter and now lag the baseline measure by levels never seen before. Moody's Red-Yellow-Green report scores markets on a scale of 0 (weak) to 100 (strong) and describes them in traffic light colors, with scores of 0-33 identified as red, 34-66 as yellow, and 67 -- 100 as green. The new second quarter study reflects data from the first quarter of 2009.

Does anyone even remember the potty theories that the mortgage crisis would be limited to subprime and how commercial real estate was going to be the savior when residential real estate sank?

Please consider Economic Ripple Effect vs. Housing Containment Theory for one such debate less than two years ago. It seems like ages.

Flash forward to today. As long as businesses are not expanding there is no driver for jobs. And here's a hint: Businesses are not expanding to any significant degree because overcapacity is rampant.

Of course there is going to be a brief uptick in the GDP because of inventory replenishment, but that does not constitute sustainable improvement in demand. Indeed, look for the current stimulus packages to fail just in time for yet another stimulus cleverly timed to help Democrats in the next mid-term Congressional elections. It won't help.

Addendum:

Dumbfounded Developer

Please consider this article on the subject of Commercial Real Estate I found on Calculated Risk's site moments ago: SuperTarget planned for Woodbury now on hold.

Target Corp. won’t proceed with its plans to build a SuperTarget store in Woodbury unless the developer agrees to rework the terms of the deal.

JMW Development, Minneapolis, had planned to begin construction on the 185,000-square-foot SuperTarget store this fall with a 2010 store opening. The development, located just off Woodbury Drive between Commerce Drive and Tamarack Road, would have included roughly 15,000 square feet of smaller retail shops and restaurants.

“We’re dumbfounded,” Johnson said, noting that Target officials had told him as recently as June 24 that the project was on track. “We’ve been working on this deal for four-and-a-half years. I don’t know how, all of a sudden, the numbers don’t work.”

The numbers do not work now for the simple reason they never really worked in the first place. The difference is that Target has finally managed to figure out the idea consumer spending would keep growing forever was something from Fantasyland.

Here is a comment from Calculated Risk: "Maybe Target has lowered their retail sales estimates for the store? Just saying ..."

Expect to see more commercial real estate projects like this die on the vine and without warning.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

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