I had lunch with our property manager today – he’s a sharp guy with hooks into much of the local (Sacramento) commercial real estate market. The development company he manages and leases property for is one of the prominent developers in town…they are still doing OK, but have certainly fallen on tougher times since 2007.
When I asked if prospective deal flow had improved – ie. prospective tenants looking to rent office space – I was surprised by his reply.
“No…actually, it’s getting worse. It’s even slower now than it was 6 months ago.”
Granted, we’re only talking about a single market here, and one that’s heavily dependent upon the Bankrupt People’s Republic of California at that.
But I can’t help but wonder – has there ever been more negative economic sentiment after a stock rally the size of the one we just experienced?
We’ve come from lows of 666 on the S&P 500 last March, all the way to 1089 on this Memorial Day weekend – an incredible 61.8% increase! And it still feels like the worst is yet to come. Perhaps that’s because it is?
One more interesting insight on the commercial real estate market, from a local investor who made a lot of money over his career in this area. I spoke with him a couple of weeks ago, and he was completely beside himself.
“B, I’ve never seen things this bad.”
I asked when he thought things might turn around.
“I’m not sure if they will – for a long time. The internet is killing brick and mortar. It’s a double whammy – there’s the crappy economy, but there’s also a huge shift in the way people buy things. You don’t need brick and mortar stores anymore.”
An interesting point I hadn’t considered. As if the commercial real estate market needed more bad news – but it makes sense. What do you need a store front for these days? Coffee shops, restaurants, bars – those make sense – it’s about the ambiance, the experience, the people around you.
But with the steady trend of buying more and more things online, there should be continued pressure on commercial real estate for years to come.
How can you play this from an investing standpoint? Last year, Seeking Alpha author David Fessler highlighted four ETF’s you may want to consider shorting as a bearish bet against commercial real estate:
- iShares FTSE Industrial/Office Index (NYSE: FIO)
- Vanguard REIT Index (NYSE: VNQ)
- Dow Jones Wilshire REIT (NYSE: RWR)
- ProShares UltraShort Real Estate (NYSE: SRS)
For more insights about the commercial real estate market, I’d HIGHLY recommend you check out the interview we posted a few months back with commercial real estate guru Andy Miller. It’s fantastic – Andy has made a lot of money in real estate, and he was astute enough to get out before the bubble burst.