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Commercial Real Estate To Plunge, Construction With It

By: Steve Johnson

7/8/2009 - 16 Comments

I thought the real estate meltdown was contained to sub-prime mortgages, according the Ben Bernanke in May of 2007.

Somehow the real estate meltdown has now reached prime mortgages.  Prime mortgages are the least likely to default, yet prime mortgages have reached record high defaults.

Business closings have also increased the available office space and that has pushed down the prices of renting office and retail space since the beginning of the year.

Today I read that ‘Apartment Vacancies in U.S. Reach 22-Year High’

“The second quarter job losses cut tenant demand and more units came to market.”

“Vacancies climbed to 7.5 percent from 6.1 percent a year earlier, New York-based real estate research firm Reis Inc. said today. The last time landlords had so much empty space was in 1987, when vacancies reached 7.6 percent as the Standard & Poor’s 500 Index plummeted 23 percent in the last three months of that year. “

Where Are People Living?

For a long time, the theory that I’ve been hearing it that apartments are going to be great investments because people can no longer afford houses and many will be looking to rent apartments.

That logic doesn’t seem to be holding true.  With a million+ homes for sale and apartment vacancies at record highs, then where are people living?

What is happening is that people are moving into smaller living spaces.  Thirty years ago the average family home was 850 square foot and that number climbed to about 1150 square foot in the last decade.  Now people are being force to live in less square footage then they have been used to.

People are moving in with relatives, parents and friends as they look for jobs.  Children are moving back in with their parents and bringing there families with them. 

A generation of spenders is looking to the baby boomer to live with, especially the ones who have their home paid off. The idea of paying off your house verses investing in the stock market seems to be the best investment advice that nobody was giving. This recession is re-educating the next generation about the value in paying off your house.

Way Too Many Houses and Apartments

The reason we have too many houses on the market is because of the sub-prime mortgage correction, created by the Federal Reserve with low interest rates and government monopoly giants Freddie Mac and Fannie Mae. 

This is the clear reason behind the millions of homes that are in foreclosure, flooding the market and collapsing the prices by 50%.

Few people realize that the governments' failed economy planning has also created a similar problem with too many apartments.  Many of the apartments that were built in the last few years, were built primarily because interest rates were so low and people had to live somewhere.

But the market is already flooded with apartments and the climbing unemployment rate means customer demand will continue to decline.   That means that even if you can build an apartment at zero percent interest, you will still have trouble created a positive cash flow. 

Construction is about to take a turn for the worst as rising unemployment will put more downward pressure on rents.  All US real estate looks to me like a bad place to invest for the next several years. 

In a few years the only construction projects that will be underway will be government funded - with borrowed money of course.  The only other construction that will remain will be maintenance and remodeling, but even that will be slow and crowded with competition. 

Many construction workers will find this recession too deep to hold on to their careers.

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