It may be hard to believe for some of you permabulls out there, but the "slump" in the housing market isn't contained to just the residential part of the equation. If you have yet to ponder this scenario then consider this chart I assembled using U.S Census Bureau data from 1993 until November 2007, non seasonally adjusted:
Over 14yrs the US added $433,350 billion in new construction spending or a 148% increase since 1993. Something Investors have a hard time coming to grips with is Newton's simple law of gravity. They just don't understand how universal the law is, from physics to investing the theory proves superior. Force is to gravity what fundamentals are to investing and economics. The fundamentals guide investors to make educated (in some cases anyway) decisions in capital allocation. Consider the facts, according to an article released by The Wall Street Journal Bulding Slowdown Goes to Commercial Real Estate suggests the fundamentals in fact do not support a 148% increase in private construction spending.
"The report yesterday showed construction spending fell 1.7% in January from December, the steepest drop in 14 years. While residential construction accounted for a big part of the decline, spending on nonresidential construction slid 0.8%."
Of course this is after record setting 2007 spending figures where "Spending on nonresidential structures rose 16% in 2007, the biggest four-quarter increase since 1984, according to Morgan Stanley." So where are investors left considering the excessive overspending on commercial real estate may be coming to an end as the US heads into a recession? Just consider what else Patterson and Hudson of the WSJ had to say:"As credit markets tightened, office space sold in the fourth quarter dropped 42% from a year earlier, and sales of large retail properties declined 31%, says Real Capital Analytics, a New York real-estate research group."
"Last year, developers built 144 million square feet of retail projects in the top 54 U.S. markets and are slated to build another 131 million square feet this year, according to Property & Portfolio Research Inc., a Boston research company. Property & Portfolio Research calculates that demand justified 36% of the new space built last year and will support 15.7% of the space slated to be completed this year."
The authors of the article referred to the past when mentioning tightened credit markets as a contributor to severely reduced sales in properties, but with major banks like Citigroup leading the way in the guessing game of how many more write downs are to come, it is safe to assume credit will only tighten further only leaving even more empty strip malls. And to complicate the situation more enter property values into the situation:
"Property values of commercial real estate are declining. A Moody's index of commercial real-estate values fell 1.5% in December from the previous month. It was the fourth steepest monthly decline in the seven-year history of the index, which nearly doubled from the end of 2000 through October.
Moody's expects a peak-to-trough decline of 15% to 20% in commercial real-estate values, returning prices to where they stood about four years ago. Goldman Sachs Group Inc. analysts have projected a drop of as much as 26%."
Sound familiar? When business is good and prices continue to rise it seems there is no bad investment for Wall Street and major corporations, I guess they just don't understand physics.
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