5th Avenue blues

Hat tip Evilspeculator

They counted 48 vacant properties (I presume mostly street-front) from 59th to 14th Streets on 5th Avenue in Manhattan. I don’t have any stats to compare this to, but it is clear that times are not so good for landlords (and their banks) in NYC. I used to live on the same block as one very large storefront shown here, and I happen to know that that particular property has been vacant for over 18 months, ever since its former tenant, a nationwide retail chain, went bankrupt.

I have noticed that many of the “for rent” signs you see in Manhattan bear the name of Vornado or other such REITs. That sector is still doomed, though traders seem to have forgotten to ask, “where’s the equity?” I suspect that in most cases, an honest accounting would reveal that net of debt and marked to market, there is none at all.

Commercial Real Estate Shoe About to Drop

The opportunity to short REITs (or IYR, a REIT-heavy ETF) is fantastic at right this moment. This is about as perfect a short set-up as you could ever wish for: securities of companies in a rapidly deteriorating sector have rebounded to near where they were a year ago when optimism was abundant and the stock market was making new highs. The ETF is actually trading where it was in the first quarter of 2006, the exact peak of real estate prices in the US.

Here is a 5-year look at IYR (I like to take the long view):

Click for sharper view. Source: Yahoo! Finance

There is a heavily traded double-short ETF, SRS, that tracks the opposite of the Dow Jone Real Estate Index with 200% magnitude on a daily basis. My preferred way to short is with LEAP puts, because despite common notions to the contrary, these options are more dummy-proof and safer in some ways than short-etfs, while allowing greater leverage so you can risk less capital on your shorts.

One more thing that makes this such a great short is that, in contrast to financials, there has not been much of a panic sell-off yet. XLF (a popular financial ETF), made a waterfall plunge from June to mid-July, which, while certainly not the final bottom, served to blow off some steam for the short-term.

I haven’t said anything about fundamentals here, but it should be obvious to anyone that commercial real estate, like residential, was heavily overbuilt because of cheap credit readily extended to Joe Blow Developers, Inc. We now have way more shopping malls, office parks and trendy urban condo complexes than we could possibly use at prices high enough allow Joe to cover his debt payments.

As the consumer gets frugal, the corporate sector contracts, and inner cities get scary again, vacancies in the respective developments will soar and rents will drop. And because this game, like housing, is played with leverage, holders of CRE are in big trouble (as are the banks that hold these loans on their books – they will soon be the not-so-proud owners of shiny new rental properties).

It should also be noted that as Treasury rates have fallen (a big red flag for the economy), there has been a little fad to buy CRE or REITS for the slightly better yield, as though they can be compared to Treasuries! Gimmie a break! Holders of this junk are in for a world of hurt, sooner rather than later.