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alstry (35.36)

Is Construction Dead in America?

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16

July 20, 2008 – Comments (6)

At least for a while?  Just sit back and think about it for a second.

For the last decade or so, we built and economy on cheap fuel and easy credit.  As a result we borrowed and borrowed and spent and spent.  As a result of increased spending, we built and built. No deal was too big or financing too hard to obtain. New buildings for mortgage companies, banks, and retailers were built everywhere.  Shopping centers and restaurants sprouted up faster than weeds.

Now gas is expensive and credit is becoming harder and harder to obtain.  Sales are slowing for many.  Businesses are shutting down by the thousands and commercial vacancy rates are skyrocketing.  In San Diego, offfice vacany is approaching 20% and even more new inventory is soon scheduled be completed.

Did we build an infastructure for conditions that no longer exist?  If so, how much extra square feet of commercial space now exits for current condions?  20%, 30%.....50%?  Do we really need so many Starbucks, HomeDepots, and Lowes?

We are just starting to see the commercial shutdowns accellerating.  Expect, over the coming months, a significant number of retailers, including auto dealers, boat dealers, and restaurants, to go out of business.  Also expect a significant number of layoffs in banking and service industries.  As the slowdowns and shutdowns continue, expect the demand for commercial space to fall off even further.

Couple the above with a whole bunch of new space coming to market in the next few months, and we may have 5 to 10 years of retail inventory vacant.  A new major area of concern will be how do we deal with the hundreds of billions of dollars of commercial debt now in peril of defaulting?

As commercial defaults rise, expect the cost and qualifications to borrow money for commercial loans to increase.  Fewer and fewer projects will likely make sense or cents.  As a result, many will likely get cancelled or never get started until current inventory comes into balance with demand.

How long will that take?  My guess is a lot longer than many think.....depending how slow things get.

Mohawk's (MHK) earnings tommorrow afternoon could give us some interesting insight where things are headed.

6 Comments – Post Your Own

#1) On July 20, 2008 at 11:02 AM, wolfhounds (29.13) wrote:

The failure of massive construction projects in Las Vegas, which is ignored by the media, will cost lenders tens of billions. The money is spread out, and will affect the ability and willingness to finance many future commercial projects.

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#2) On July 20, 2008 at 11:23 AM, abitare (35.89) wrote:

Yepper, long SRS, short General Growth Properties Inc. (GGP)

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#3) On July 20, 2008 at 6:21 PM, LordZ wrote:

The housing phenomenon was almost joke like with prices surging beyond what was reasonable, I remember flying into vegas in 2007 and seeing high rise condo like apartments being built being offered for 700,000.

seven hundred thousand for an one or two bedroom, some people fearing not ever being able to afford a home bought into the hype and over paid, people and lenders over extended themselves, but its not the end of the world.

 

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#4) On July 20, 2008 at 7:39 PM, alstry (35.36) wrote:

Wolf,

The problem now is that most commercial projects no longer pen out.  We are seeing lending to CRE come to a virtual standstill.  Few really understand how big an impact CRE has on our economy.

Hundreds of billions per year for the past few years which is now disappearing.  Add in residential, and we are looking at a very material percentage of GDP evaporated.

I think its amazing how government officials get on TV and say everything will be OK in a few months.  A few months ago, they said things were going great.  Can you imagine what they are going to say in a few months..........

I guess most of them will be gone by then so they can say anything they want.....for now.

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#5) On July 21, 2008 at 3:54 AM, DemonDoug (70.53) wrote:

I think its amazing how government officials get on TV and say everything will be OK in a few months.  A few months ago, they said things were going great.  Can you imagine what they are going to say in a few months..........

This statement makes me smile Al.  While we disagree on the underlying mechanics of the macroeconomics of the situation, we both definitely agree that the powers that be are basically lying liars, and are generally wretched humans that have definitely done much more harm to society than any tiny good they may have done (or say they have done).

I think you also share my opinion that many of these bastards should rot in jail for very long times and should not be allowed to profit from their immoral and illegal actions.

Throw the book at the lot of them.

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#6) On July 21, 2008 at 5:28 AM, alstry (35.36) wrote:

I think the only thing we possibly disagree on is whether there will be inflation or deflation in the future....what ever the outcome, I think it will be a difference without a distinction.

Either way, if wages can't keep up with prices, we are screwed.

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