Monday, November 10, 2008

The next shoe to drop...

We've seen the subprime mortgage crisis spill over to the whole residential mortgage industry, causing property values to plummet in many regions. Collateral debt obligations and credit default swaps turned sour have caused a further erosion of asset values and balance sheets across the globe. This has caused a run on several investment and commercial banks, most notably Lehman Brothers and Washington Mutual, respectively. This cascaded over to the stock market, leading to breath-taking declines across all sectors, including industries in hard assets, like oil, natural gas, gold, and the other minerals and commodities. While the Fed dropped its funds rate to 1.0%, and the Treasury turns on the money spigot, we anticipate future inflation. However, due to massive investor redemptions at hedge funds and now mutual funds in an effort to raise cash, individuals and institutions alike are scrambling to de-lever their precarious financial conditions. Deflation--not inflation, is the current concern. The R word (recession) is not a question of if, but how deep and for how long.

So the worst is over and the unknowns are out on the table, right? Wrong. Just as many teaser residential loans have been re-setting, causing a barrage of foreclosures, the commercial real estate market, which has held up relatively well up to this point, is now in real danger of falling off the precipice as well. As companies announce massive layoffs, and as consumers hunker down to save for a rainy day, companies have lowered earnings projections (hence, shares of equities have plummeted). These conditions will be disastrous for commercial real estate values, which are ultra-sensitive to economic conditions. Expect more bankruptcies, vacancies, and foreclosures in the commercial real estate space.

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