Skip to main content

Other shoe drops on REITs

REITs focused on commercial real estate have been dropping due to rising interest rates and the fear of a credit crunch that might put a damper on the lively pace of buyouts in the sector. With rates coming down, I expected these REITs to at least slow the rate at which their stock prices have been falling. As we saw this past week, though, selling actually accelerated.

What's going on? Opening the Wall Street Journal this weekend, I believe I found the answer. There is an article detailing the increase in delinquencies in the commercial real estate sector. Previously, delinquencies and foreclosures are things that were only being discussed in relation to residential real estate. Now it seems they are spreading to commercial real estate, as well.

There have been some articles in the business press about how vacancies are low and rents rising in commercial real estate. Thus, it initially comes as a surprise that there are delinquencies. In looking into the details, however, the cause of the problem is the same as we are seeing in the residential sector: shoddy lending practices.

There has been a wave of real estate transactions as REITs have been taken private and property has changed hands. All these transactions take place, of course, with borrowed money. Underwriters overvalued the real estate backing the loans and overestimated borrowers ability to repay. The properties and the borrowers are now loaded with more debt than they can support. Sounds familiar, doesn't it?

In another familiar twist, the loans were bundled to create commercial mortgage backed securities, known as CMBS. Now, as underlying loans experience delinquencies, some of these bonds are being regarded as riskier than initially thought.

So far, the rate of delinquencies has not reached serious proportions; however, there is no assurance that it won't. Indeed, as we are seeing more delinquencies it appears they are occurring earlier than usual.

REITs have been in trouble for a while now. First we had bad credit conditions. Now we have rising delinquencies. The other shoe has dropped.

Comments

Popular posts from this blog

Unlock Stock Market Profits - Key #1

This is the first in an ongoing series of articles where I discuss what I feel are keys to successful investing. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. ( Click here to read the original post ) There are two basic steps to investing. First, you need to find stocks that seem to have some potential. Then you have to determine whether these stocks are actually good investments. There are many stocks that at first glance look interesting, but further research reveals that there are too many negatives to warrant taking a position. This first post in the series starts at the beginning: getting good investment ideas. Key #1: If something special is happening to a stock, it will be reflected in some kind of unusual activity in the markets. As individual investors, we will never be the first to know; however, unusual activity can be an early sign that allows us to follow the Wall Street profess

Unlock Stock Market Profits - Key #4

This is the fourth article in a series of posts describing 10 tools to help you identify and evaluate good investing ideas. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. ( Click here to read the original post ) With this fourth post, we will continue another step along the path of finding stocks that seem to have some potential. The first post in the series discussed how to use unusual activity to identify investing ideas. The second post described how to use stock screeners. The third post described how to use lists of new highs and new lows. This post will focus on identifying social or business trends in order to find investing ideas. Information on new trends might turn up anywhere. In conversation with friends or business associates, in newspapers or magazines, on TV or though your work. The key is to be aware of trends and how they start, stop or change. We'll start by describing wh

Interactive Ads - Google one-ups Yahoo again

Google's ( GOOG ) press release describing the expansion of a beta program for what are being called Gadget Ads has again shown that Google is unparalleled at melding technology and advertising to benefit its bottom line. Gadget Ads are mini-web pages or "widgets" that can be embedded within publisher pages. I have written in the past on Yahoo's ( YHOO ) Smart Ads and how, by more precisely targeting site users and adjusting ad content accordingly, they provide a much desired evolution of the banner or display ad format. Though Smart Ads and Gadget Ads are not really the same, I think it is fair to say that Google has seen the challenge of Smart Ads and has chosen to leapfrog Yahoo by rolling out its own update to the display ad format. The evolution of the Gadget Ad -- One of the trends on the Internet over the last year or so involves software developers creating "widgets" which can be hosted within web pages and blogs. Widgets can be pretty much any