Tight Oil And Weak Commercial Real Estate
Nasty Trend Ahead For Commercial Real Estate
Investors have become accustomed to rising real estate prices on the commercial side, and have been hoping that oil prices fall. But new evidence suggests that both expectations might be nothing but pie in the sky.
According to the Wall Street Journal, Moody's Investor's Service has concluded that "The value of commercial real estate, which nearly doubled in the past seven years, is now starting to decline due to the credit crunch."
The details suggest that trouble is spread throughout the U.S. as "the value of commercial property declined 1.2% in September from the previous month. Particularly hard hit were apartments in the West and office property in most states other than California."
Citing the Moody's report as an "early sign" of more trouble ahead, the Journal noted that the "commercial-property sector is being dragged down by the growing reluctance of lenders to extend credit for anything related to real estate, which in turn could create a new drag on the economy and additional problems for investors. Declining commercial-property values could lead to an increase in default rates on commercial real-estate loans and on commercial mortgage-backed securities."
Although "no one" expects the trouble in commercial real estate to equal that of subprime home mortgages, the report suggests that the commercial real estate market is now at a key "inflection point" as "commercial-property values are primarily being hurt by the increasing cost and declining availability of financing."
Still, the Journal notes that interest only mortgages have been increasingly popular in commercial real estate, creating the potential for more trouble down the line.
More interesting is this: "Already there are signs of slowing in some markets. Available sublease space swelled to 77 million square feet in the third quarter from 73 million square feet nationwide in the second quarter, the first national increase in five years, according to Grubb & Ellis Co."
Tight Global Oil Supplies Ahead
Gee, get this. According to the Wall Street Journal "A growing number of oil-industry chieftains are endorsing an idea long deemed fringe: The world is approaching a practical limit to the number of barrels of crude oil that can be pumped every day."
In other words, the big guys in the oil markets, large corporations and oil rich states are signing on the Peak Oil theory.
These are the same guys that last year were telling the world that there was plenty of oil and were singing "Don't worry. Be happy."
What's changed? Reality has clearly set it. Part of it, to be sure, is that you can make more money off of $95 crude than you could from $40 crude.
But the other part has to be that it is clear now that OPEC and non-Opec has not expanded its production and refining capacity enough to service the demand of a world where China, India, and other countries are increasing their demand while the U.S. continues to guzzle every drop of oil that it can get.
Yup, the new buzz is that the easy oil has been found and that any new supply will be hard to get and will be expensive.
According to the Journal "The new adherents -- who range from senior Western oil-company executives to current and former officials of the major world exporting countries -- don't believe the global oil tank is at the half-empty point. But they share the belief that a global production ceiling is coming for other reasons: restricted access to oil fields, spiraling costs and increasingly complex oil-field geology. This will create a global production plateau, not a peak, they contend, with oil output remaining relatively constant rather than rising or falling."
When did all this start? Appropriately on Halloween when 'Christophe de Margerie, the chief executive of French oil company Total SA, jolted attendees at a London conference by openly labeling production forecasts of the International Energy Agency, the sober-minded energy watchdog for industrialized nations, as unrealistic. The IEA projects production will grow to between 102.3 million and 120 million barrels a day by 2030. Mr. de Margerie said production by 2030 of even 100 million barrels a day will be "difficult."'
And, oh, what a shock, Mr. de Margerie added fuel to the fire noting that this was '"the view of those who like to speak clearly, honestly, and [are] not just trying to please people," he bluntly declared. The French executive said many existing oil fields are being depleted at rates that will damage their geologic structures, which will limit future output more than most people allow. What's more, some nations endowed with large untapped pools of oil are generating so much revenue from their current production that they feel they don't need to further develop their fields, thus putting another cap on output."
Finally, we thought this was interesting: "A former head of exploration and production at Saudi Arabia's national oil company, Sadad Ibrahim Al Husseini, has also gone public with doubts. He said in London last month that he didn't believe there were enough engineers or equipment to ramp up production fast enough to keep up with the thirsty global economy. What's more, he said, new discoveries are tending to be smaller and more complex to develop."
Conclusion
Let's see, commercial real estate is on the verge of a decline after a seven year bull market, and global oil production has peaked.
What's most significant is this, commercial real estate is the last holdout bull market sector in real estate to feel the pinch of the subprime mortgage related credit crunch, but its top has arrived just as the oil industry is telling us that prices are about to stay high for the extended future.
When you add the fact that China's government has told banks to stop lending money, you just have to wonder what's around the corner.
This time, gulp, might be different after all.
Market Intelligence Report
by Dr. Joe Duarte |
