ok, NOW, I'm scared!

Wall Street's Next Crisis

Dec 17 2007

Now that the subprime shakeout is nearly over, another real estate mess looms, this time in commercial property.

by Jesse Eisinger

So far, the current credit crisis has zeroed in on mortgages for the less affluent. But easy credit was a sprawling millipede whose wobbly legs reached into the farthest corners of the financial markets. This is the year the other 999 shoes start to drop.

Any loan to any borrower can begin to seem subprime if there's too little down and too much debt. And that, unfortunately, brings us to the commercial-real-estate market.For the past several years, the market for commercial property—offices, malls, apartment buildings, industrial plants, warehouses, and the like—has enjoyed the very best of times. Prices soared, and lenders lent readily. Owners had no problem meeting their payments. By early 2007, delinquencies had fallen to record lows.

In their own way, however, commercial-real-estate loans were no less foolish than those made to home buyers with speckled credit. And as with the subprime mess, the reckoning will come. Just like what happened in other sectors already hit by the credit crunch, these loans will cause problems that will probably find their way beyond the obvious players in the commercial-real-estate market. Judging by the aspects of the credit crisis we've already seen, commercial-real-estate trouble will probably emerge sooner than people expect—and will be worse than they anticipate. Portfolio

Analysis: as a Commercial Real Estate Appraiser here in lovely NYC I speak from first hand experience when I say that what people are paying for rinky dink apartment buildings in Brooklyn is just a little too much for my comfort, stomach and most of all common sense. It seems the same yayhoo's who thought that finishing a Carlton Sheets or Ron LeGrand workshop qualified them as "house flippers" also qualified them as real estate "entrepeneurs" and therefore they can "MAKE IT BIG!" in multi-family investing. The most quoted, and hence, the least favorite thing I like to hear is "Hey, but it sold for 10 times rents!" SO!?!? What are the rents? What are the taxes? Expenses? INSURANCE!?!?! Vacancy rates? Neighborhood trends? Oh and most importantly, DEBT SERVICE?

When your "posh" Bed-Stuy / Bushwick / 'Billy Burg "gonna be condo one day" shack starts losing tenants because of the more than likely recession because the rents were too high from the git go you're gonna have a hard time paying YOUR mortgage let alone the building's mortgage.

Hint: WAIT! Keep your powder dry. Walk the streets of those neighborhoods that you're thinking of investing in. Use your EYES. Honestly assess the stability and quality of the neighborhood(s) your looking at. No cars on blocks? GOOD! But crackheads around the corner? NOT GOOD! Take a lesson from Warren Buffet: invest in something that is unpopular, cheap, but WILL rebound and most of all wait. Don't be Donald Trump.