The Dangers: Commercial Real Estate and Retail

The year end retail prospects are grim. It appears that the American consumer has started to shut down. Likelihood of purchases at a cost in excess of $ 500 for a single item are significantly lower than ever before experienced. Circuit City, a $10 billion per year retailer of electronics announced bankruptcy yesterday, November 10, 2008. All those stores are going to close - after Christmas. DHL, the huge international delivery service announced that it was shutting down domestic U.S. delivery. My little office was caught with more than $ 1,000 worth of pre-paid delivery envelopes. Maybe this is a good sign for UPS? My former employer in downtown D.C. has announced that it is ceasing local operations and letting the current lease lapse.

However, these two large companies and thousands of other smaller operations like MTSS have operated in leased real estate. Often these types of real estate leases are part of companies like Federal Realty of Bethesda, Maryland. One could reasonably predict that one of the fall outs from failing retail operations will be a significant pressure on the the income of the real estate investment trusts. How have real estate operations been doing across the country in recent times? For that information, I went to the performance of the real estate equities which are components of the Wilshire 5000 index. The answer is that they are having a bad time.


Date Symbol DJ Wilshire Index Name Market Cap (in millions) 1 Month
11/10/2008 DWGRS DJW Global RESI 319666.89 -15.79%
11/10/2008 DWGRST DJW Global RESI Total Return 319666.89 -15.45%
11/10/2008 DWXRS DJW exUS RESI 176536.14 -2.37%
11/10/2008 DWRIO Industrial/Office 33804.32 -35.47%
11/10/2008 DWRIN Industrial 7790.19 -52.99%
11/10/2008 DWRMX Mixed Industrial/Office 6075.96 -28.31%
11/10/2008 DWROF Office 19938.17 -27.06%
11/10/2008 DWRRS Residential 25871.52 -25.42%
11/10/2008 DWRAP Apartments 24796.82 -26.00%
11/10/2008 DWRMH Manufactured Homes 1074.69 -8.68%
11/10/2008 DWRRT Retail 34826. -29.05%
11/10/2008 Factory Outlets 1008.73 -6.78%

AIG and Fannie Mae are asking for more money, more capital. I just don't think this is over. In fact, I am getting more pessimistic every day.

To quote today's Wall Street Journal:

"With a less-onerous government bailout plan in hand, American International Group Inc. reported a $24.5 billion quarterly loss Monday due to big investment losses and another $7.1 billion in write-downs on its portfolio of credit derivatives.

The new $150 billion rescue package for AIG -- the largest government loan to a single company -- that also was announced Monday eases the terms of the previous deal, and officials portrayed it as helping the company get some of its most serious problems under control."

Empty offices and retail store fronts mean loss of jobs. Janitors, security officers, store clerks, truck drivers, advertising agents, office equipment repair technicians, etc. etc.

Add on the inevitable job losses at Ford and GM and all the peripheral suppliers and support personnel that go along with this huge industry. How big is GM? They are losing money on cash sales in the last three months of $ 37 billion. Sphere: Related Content