On November 19, bonds and stocks backed by commercial real estate loans plummeted on investors’ fears the struggling U.S. economy might lead to a wave of defaults.

Big real estate companies suffered big losses: shares of Simon Property Group, the top U.S. mall operator, declined 13%; Boston Properties Inc., owner of skyscrapers and office buildings in key U.S. markets, fell 12.1%.

General Growth Properties Inc., which owns more than 200 mall properties throughout the United States, is teetering on the brink of annihilation. If the flailing company can’t come up with the $958 million of its debt that is now due, and the $3.07 billion due next year, it will have to file for bankruptcy protection.

“Ghost malls” may become a common sight around the country, with major mall developers and big-name retail chains like Linens ‘n Things and Circuit City going broke and others, such as Starbucks, closing hundreds of stores nationwide. Small businesses are even worse off as shoppers tighten their belts.

A recent Newsweek article quipped that it would “take some kind of sorcery to keep the current mix of store closings, skeletal inventories, hard-to-find sales staff and anxious consumers from turning the yuletide shopping season of 2008 into a seriously cranky Christmas. Even Santas have been getting pink-slipped.”

None of what’s happening surprises Andy Miller, a consummate real estate entrepreneur and friend of Doug Casey’s, who presented his outlook on the commercial real estate market in the September edition of The Casey Report.

Miller on Retail Shopping Centers:
“Retail  are the most exposed product type. For example, we have a grocery-anchored shopping center in Phoenix that’s about 94% occupied. We’ve been trying to sell it for the last nine months. We’ve had it under contract probably four times. Each time, it’s fallen through because the buyers were unable to find a lender. The lack of liquidity is particularly acute in the commercial markets.

“Most commercial mortgages that were written over the last 10 years for most product types, except apartments, were done by conduits, and they were done by asset-backed finance securitizations, CDOs, etc. The overwhelming number of those conduits are now either out of the market or shut down. There’s going to be a tremendous upheaval in the commercial market relative to the fact that there’s almost no conduit money available anymore.”

Miller on Office Space:
“The office market, of course, is eroding. While I expect the central business districts around the 20 top cities in the country to probably be relatively stable in terms of office occupancy, I think the suburban markets are going to get creamed.”

Miller on Warehouses:
“Warehouses are bad. They’re very flat. Users are consolidating; they’re not expanding.”

Miller on Hotels:
“I’d also be wary of hotels. The hotel business is proliferating right now, in a way that I’ve never seen. There are so many new hotels being built right now nationally that there’s no way, even in good times, that I think they could sustain occupancy. A lot of these hotels now have created new flags and they’re putting them in multiple locations in most big cities. So there’s been a tremendous proliferation of hotels and, with high air fares and high gas costs, there’s no question that that’s going to be a bad place to be.”

Miller on the Real Estate Bubble:
“There is no historical comparison to the situation today. Not even the Great Depression was like this. I believe we’ve just lived through the greatest expansion of capital in the history of planet Earth, in the history of mankind.

“And this happened really all over about 12 or 13 years, this gigantic, dynamic expansion of money. There is no precedent for this. One truth about cycles is that the downward part of the cycle is usually quicker and more painful than the upward swing. We didn’t get into this thing overnight. It took many years, and we are not going to get out of it overnight. It’s going to take many years to unwind.”

Waiting for the other shoe to drop is an uncomfortable position to be in. Thankfully, there are a number of lifelines we as investors can grab on to, to avoid getting sucked into the whirlpool of declining asset values and a declining dollar… and we should take every chance we get to use them.

How well you do in the unfolding crisis will depend on how well informed you are. “Making the trend your friend” is now more critical than ever to financially survive the onslaught of tidal waves rocking the U.S. economy. The Casey Report diligently analyzes major economic trends and provides actionable advice on how to profit from the  “market riptides” – with the goal of preserving and multiplying your assets while others capsize in the stormy seas. Learn more here.

Olivier Garret, Casey Research

Source: Commercial Real Estate – the Next Show to Drop

–The end result of the weekend’s talk fest is that oil and food prices will probably head higher and the U.S. dollar will head lower. The big shadow looming over global “growth” will get darker and longer.

–Today, however, don’t be surprised to see a nice little rally in share prices. We have no idea why that would be the case. But that’s what all the papers say. America rallied on Friday. It’s our turn!

–Indecisive is the word we’d use for the market. The Reserve Bank may shed some light on future interest rates when it releases its meeting notes later this week. But it’s going to be like this for the next few months, we reckon. High oil prices and inflation have everyone around the world worried sick about “growth.”

–Growth is progress. It’s the nearest thing economic atheists have to religion. The financial economy requires growth in earnings, growth in GDP, growth in credit, and growth in asset prices to function correctly. Without growth, there is recession.

–Of course the financial economy is NOT functioning correctly because all that earlier credit growth didn’t create real value…it just created higher prices for houses, financial stocks, and exotic financial instruments. But wait! There’s an upside to all this. Real wealth destruction apparently creates…value!

–Now is an excellent time to pick up cheap stocks, we are told. There may be no growth, but at least there’s value.

–Hmm. That may be the case. But we wouldn’t make it for “the market.” Now is not a good time to simply buy “the market.” If you want to find value, you have sort out the winners and losers from this ongoing bear market in credit. Babcock and Brown? A loser. And who will the winners be?

–Well, value is no good without growth. That is why the distinction between the two is pretty useless. It’s a distinction that allows professional economists to be bullish at all times, buying growth in a bull market and value in a bear market.

–But a bear market is not good for stocks, no matter how good the stock is. Still, it pays to focus on good stocks and to remember that a good stock is a combination of tangible value AND growing earnings. To grow earnings, it has to be a good business run by smart people.

–You can break down a good business and good management into numbers and metrics. That is what we do in our two investment newsletters, Diggers and Drillers and the Australian Small Cap Investigator. That’s why this is still a stock picker’s market and will remain so for the next few years. Good luck stock pickers!

–Did you see that the people of Ireland rejected the massive Superstate project being foisted on them by the unelected socialist/fascist/communist bureaucrats in Brussels? Let’s buy that country a Guinness. Or four, since we’re binging.

–The Irish were some of the only people in Europe actually allowed to vote on the European project. That’s because Ireland’s constitution requires that any changes to it be voted upon by the people. Free people are reluctant to give up their rights to the State without a very good reason. That’s how they stay free, by containing the growth of the State and its faceless minions.

–This is exactly why the whole EU project has been concocted, discussed, and ratified at the Parliamentary level in Europe-so the people don’t get a chance to vote and say no. And here we thought America’s political class was out of touch and at odds with the electorate. In Europe, the political leaders treat the people with contempt, like children who will be told what to do whether they like it or not.

–We mention it only to point out that the Europe’s currency is fundamentally as flawed as the U.S. dollar. The dollar is poorly managed. The Euro-a mongrel currency for many different economies with many different needs-will fare no better in the long run.

–About the only thing that could lead to a U.S. dollar rally in the short-term is a euro catastrophe. It’s not the sort of thing you forecast. But it’s the sort of thing to keep in mind.

–Speaking of unsustainable myths, what about the Aussie housing market? It’s been a while since we visited the subject. But the housing Pollyannas are coming out of the woodwork again. And they’ve brought two friends with them this time.

–Immigration and easier credit. This the dynamic duo that will lead Australian house prices as much as 22% higher by 2011 according to a new report from BIS Shrapnel. “House prices are tipped to rise next financial year as Australia’s fastest population growth in two decades outweighs the effect of higher interest rates, an economic forecaster said.”

–The big surge in immigration will drive houses prices up everywhere in the next three years. BIS tips 22% gains on the Gold Coast and Sunshine Coast, 21% in Darwin, 18% in Sydney, 16% in Adelaide and Melbourne, 15% in Canberra, 14% in Hobart, and just 9% in lowly Perth.

–Granted, we haven’t seen the detailed research that supports these conclusions. But doesn’t it depend on what kind of immigrants you get? High-wage skilled immigrants might buy. Lower-skilled immigrants (like your editor) will probably rent because it’s all they can afford to do. Housing is still a financial question, not a demographic trend.

– It’s true that everyone needs a place to live. But not everyone can afford to buy a house-especially when the median house price in all the land is $458,888. Imagine getting off the boat and finding out that’s what it will cost you to get your new life started in the Lucky Country.

–By all conventional historical measures, house prices are already well-ahead of where they should be in Australia. In the 1970s, median Aussie house prices were about three times median household income. If you made around $10,000 a year, you could expect to pay about $30,000 for your first Australian dream.

–According to the Australian Bureau of Statistics, the median household weekly income in Australia is $1,027 per week, or $53,404 per year. The median house price is $650,000 in Sydney, $500,000 in Perth, $515,000 in Darwin, $432,000 in Melbourne, and $365,000 in Hobart.

–That means that at the high end, home buyers will pay as much as ten times their income to get a house in most parts of the country. If you live in Tasmania or South Australia, house prices will be lower, but incomes might be lower too.

–Do you see the problem here? The only way to make up the difference between income and asking price is with debt. The big D. The Devil’s favourite word. That’s what’s driven house prices up so much already…people gearing up to get into the market with the belief that house prices will keep rising. Yet historically-when it’s not a bubble-house prices go up at about the same rate as inflation.

–The demographic argument for higher house prices is also a stupid and misleading one. We heard it for years in the States as a way to justify stupid financial decisions. Everyone needs to eat, too. But if you don’t have a lot of money, you don’t eat in fancy restaurants. You shop at Woolworth’s and cook at home.

–What you put in your body and where you lay your body down to sleep at night are always financial decisions. And that come down to interest rates and how big a monthly mortgage payment you can afford. Demographics don’t change affordability (if anything, you’d expect immigrants to be in lower income brackets and further away from home ownership). Just because there are more people doesn’t mean they can all afford a house or get credit to buy one they can’t afford.

–That’s really the big revelation/claim/fantasy in the BIS report. “As credit conditions recover over the course of 2009, we expect banks will gradually pass on lower borrowing rates to customers,” the report’s author concludes. Yes. Because banks are generous like that, especially when they’re trying to rebuild their profit margins and recover from losses and write offs.

–Will credit conditions recover in 2009? We reckon they will never be as good again in our lifetimes. The bull market in credit was the greatest the world has ever seen. It’s a bear market now, and it’s still pretty early in that bear market. Be ready for a long few months.

Source: A Dubious Housing Forecast