Hallucinogens

That’s the only explanation I can up with for the sudden 2%+  spike in IYR, the commercial real estate index.

Maybe we’re not going through one of the most Hayekesque destructive periods in the last three generations, but the signs I see say we are.  And I’m not talking about a Mexican bombshell blasting away in B-movies, either.

I’m talking about bricks-and-mortar.

The tallest building in Hartford, CT is about to lose its lead tenant, and the skyline is about to lose an iconic logo (BankAmerica).  When BAC couldn’t reach lease renewal terms with the owner of the skyscraper, they announced they’d be moving into smaller digs across town.  They were quick to reassure the local TV newscasters that they wouldn’t be laying off people.

Hmmm.

Maybe what they’re doing is spending a cool $100 million or so to move their people into smaller cubicles.  Maybe they’re going to let their staff work from home more often.  Maybe they’re installing bunk desks.  Or maybe they know they’ll enjoy the burst of productivity growth private business is harvesting right now.

For those that don’t know the code words, productivity is where a company gets more profits while paying for less labor.  Sure doesn’t sound like a reason to get excited about owning commercial real estate, at least until the entire field is re-valued using lower rental rates and lower occupancy.

Things don’t seem a lot better in retail land.  For sure there will be fewer car dealerships, because thousands have already gotten zapped.  Online sales continue to grow, and even iPhone apps make it less and less likely that a consumer will pay a higher price at one store than another, making all those square feet less valuable.

Then there’s the insanity of commercial real estate pricing during the bubble.  Investors were not just planning on ever-increasing rents, but also figuring that American commercial properties would be worth owning at cash-on-cash returns lower than the returns on Treasury Notes.

Turned out they were part of a mass hallucination, and more than a few community banks are gonzo because they lent money to the owner/developers of properties that used that kind of thinking to rationalize their decisions.

A return to 10% cap rates (the imputed interest rate a property owner gets on their equity investment after all expenses, including financing cost, taxes and maintenance) will lower the value of real estate quite a bit, and necessarily lower the value of the elements of the real estate index.

So color me bearish.  I’ll be looking into a twofer this afternoon.  Taking advantage of the natural compounding problem with the double-daily ETF’s, I’ll be seeing if I can borrow some URE to short.  It is the ETF that looks to replicate twice the daily move of the IYR index.

Sorry, George…. Remember last year when I called to tell you to invest in your very own stock?  It was at $3 a share.  Now it’s at $9.

hh

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One Response to Hallucinogens

  1. hhill51 says:

    Didn’t get the borrow.

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