Wednesday, July 08, 2009

Well, it's not news to my readers....

Distressed Commercial Real Estate has soared so far in 2009 and this has come as a shock to some people.

"Commercial properties in the U.S. valued at more than $108 billion are now in default, foreclosure or bankruptcy, almost double than at the start of the year, Real Capital Analytics Inc. said.

There were 5,315 buildings in financial distress at the end of June, the New York-based real estate research firm said in a report issued today. That’s more than twice the number of troubled properties at the end of 2008.

Hotels and retail properties are among the most “problematic” assets following bankruptcy filings by mall owner General Growth Properties Inc. and Extended Stay America Inc., according to the report. The scarcity of credit is causing property defaults in all regions and among every investor type, Real Capital said."

I'm a little surprised by the rate of deterioration (doubling in the first 6mths of 2009) but there is no doubt the US has a dramatic excess supply of commercial real estate and it's going to take many, many years to work off this excess inventory. As it relates to Upstate NY think about the two most problematic areas mentioned in the article - hotels and retail. Just about every new commercial property in Jefferson County in the past 4 years has been hotel or retail. I don't think I'd want to hold the loans on some of those properties.

I hate to see the discussion about our nation's financial condition deteriorate into partisan bickering, but that apparently is the nature of the beast. I will note that the GAO report on the stimulus echoed my early concern that the stimulus wasn't really stimulating anything, rather it was being used to maintain the status quo.

"The report released Wednesday by the Government Accountability Office, Congress' investigative arm, found that the $787 billion stimulus package is being used to "cushion" state budgets, prevent teacher layoffs, make more Medicaid payments and head off other fiscal problems."

"For example, the GAO said about half the money set aside for road and bridge repairs is being used to repave highways, rather than build new infrastructure. And state officials aren't steering the money toward counties that need jobs the most, auditors found."

Anyone that has driven along a major interstate right now is aware of the substantial "repaving of America" that is underway. The problem with spending the stimulus money to plug gaps in state budgets is that it assumes state revenues will bounce back soon. However, as we continue to see from California to Massachusetts, tax revenues continue to come in below even the most pessimistic assumptions. This means big cuts in services and state jobs in 2010 or another round of stimulus (however, they'd be smart to call it something other than stimulus - call it what it is - emergency aid to states).


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