Commercial Real Estate Blog

The lender that was honored as “Lender of the Year” for 2006 just two short years ago has now seen itself get sold to Citigroup for next to nothing. Wachovia, who held the position as the largest commercial lender and servicer in 2006 is now gone. Wachovia generated in excess of $60B in commercial mortgages in 2006, and serviced nearly $180B in mortgages and CMBS that same year.

We are really in the midst of something historic here, as a huge consolidation of power and wealth is happening right under our noses, and we are paying for it. If you’re familiar with the Panic of 1907, you will see that history is suspiciously repeating itself, and if there is a lesson to be learned, it is that JP Morgan Chase Bear Stearns Washington Mutual will definitely survive, and that Bank of America Countrywide Merrill Lynch US Trust LaSalle, Barclays Lehman Brothers, and Citigroup Wachovia will likely be right there too.

USBanker Magazine is featuring an article in its September issue discussing the impact of the current financial turmoil on office space vacancy rates. According to the article, New York’s Independent Budget Office is forecasting roughly 60,000 total job losses stemming from the credit crunch. The CEO of New York’s GVA office has estimated that as much as 3.7 million square feet of space can come back on the market in the next quarter alone as companies such as JP Morgan (Bear Stearns) dump or attempt to sublease space.

Of all the markets with the largest financial exposure (New York, Boston, Chicago, San Francisco), Orange County has been the hardest hit with 3-4 million square feet of space combing back online on top of the 8 million square feet of new construction. The vacancy rate there according to the article has risen a thousand basis points in one year alone.

The Fed’s recent actions to help stabilize economic conditions are not impressing foreigner’s holding US debt instruments. The inflationary actions of the Fed have resulted in foreign buyers of US debt to essentially boycott government auctions for treasuries.

Over the past eight weeks, the share of foreign buyers participating in these auctions was somewhere around 25%. In last week’s auction, they represented only 5.8%.

Additional steps the Fed has taken or will take this week include bailing out Bear Stearns by essentially financing a JPMorgan takeover of Bear Stearns. The emergency overnight rate for bank’s was cut by 25 basis points, and in the Fed’s next meeting, they might cut interest rates by as much as seventy five basis points.

Unfortunately though, the Fed can only control short term rates. What the Fed cannot do is control long term rates and that is what will affect commercial real estate going forward. The current economic conditions, compounded by inflationary pressures and increasing long term rates does not bode well for holders of such real estate. What we see is people continuing to be bullish in certain market sectors, but it is hard to see how they envision that some sectors, such as Silicon Valley, will escape unscathed.

Time will tell who is right, but with a weakening dollar and thereby increasing commodity prices (for those priced in US Dollars), the effect will be felt in Silicon Valley. We are seeing some Venture Capitalists increasingly wary of their ability to raise any more money in this market and have become increasingly conservative in placing investments.

This has already and will continue to have an impact on the Silicon Valley Market.