We have all become far too familiar with the current housing mess. Whether we have experienced the problems directly or are just worried about shrinking values and loss of equity in property we own, it is impacting all homeowners. Trying to sell isn't easy because of prices being too high, but because there are simply no buyers to sell them, too. Credit conditions are tight, lending standards have toughened, and with all other asset classes depreciating as well, interest in buying homes simply isn't there right now.
Well, there is another part of the real estate market that is also being impacted, and it is commercial real estate. It wasn't too long ago that, in places such as New York City, buildings were being bought at prices that required rents to grow at a 10% annual rate just to break even. They had grown at that rate, and the sky was the limit. So pay any price you can, just get the building. It sounds a lot like the housing market just a few years ago.
The demise of the financial industry, a weak economy and huge layoffs mean that businesses don't need to rent as much space, and they aren't. If they do, the supply is so high and demand so low that rents are actually dropping, making these later building purchases at high prices unprofitable. Let's also realize that these are highly leveraged investments and that the financial issues of tight credit and widening spreads are also another large negative impact on this business. We all know that retail is struggling and those businesses are closing locations or going out of business, leaving another weak area in commercial real estate.
There is a way to benefit from this, or at least hedge some of the associated risk, and we believe that we may actually be seeing large commercial real estate players shorting the real estate ETFs as an attempt at some kind of hedge against their depreciating real estate portfolios. The iShares Dow Jones U.S. Real Estate Index (IYR - commentary - Cramer's Take) ETF is showing the effects of the problems this industry is facing.
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At the time of publication, John Hughes and Scott Maragioglio had no positions in the stocks mentioned.
Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.
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