It was said that everything else within the financial markets would stay strong.

In reality, they were not “on the money”. In March 2008, I suggested that there would be a financial erosion of the commercial real estate markets and the financial implosion would seep into it. I wrote: “Which property owners are sitting on commercial properties that are going to lose value in the vortex of property depreciation?”

The opening paragraph in last week’s Crain’s New York says it all:

Deutsche Bank’s deals to sell three buildings formerly owned by Harry Macklowe for a total of about $2.4 billion set a new floor for Manhattan office properties … that represents a sharp break from the frothy records set [in 2007].

By most estimates, the agreed-on prices of the three buildings are [20 percent to 30 percent] less than they would have been a year ago.

Manhattan office properties? This is more than just the major leagues of real estate. It is the World Series of real estate. A 20 percent to 30 percent readjustment? This should send a clear message to buyers, sellers, financiers and the out-of-touch pundits that sliding values of real estate are not limited to the residential markets or to a narrow group of sub-prime borrowers.

The Crain’s New York article also points out:

[In 2007,] prices for Manhattan office towers hit dizzying heights as rents surged and financing flowed. However, the sub-prime residential mortgage crisis spilled over into the commercial market [and turned] off the financing faucet.

Spilled over? It spilled over all right like a Wisconsin lake breaking a dam. It’s funny how the economists and pundits seemed to miss that deluge. It’s like TV weathermen while they review their charts saying it’s clear outside except for a couple clouds. If they would only stick their head out the window, they would see it’s pouring rain.

The economists and pundits need to stick their heads into the real world in order to get a better take on what’s happening.

Some Economists Still Don’t See the Big Picture

Why do many economists and industry experts not see the obvious? At last week’s Business & Institutional Furniture Manufacturers Association, Fifth Third Asset Management economist Mitch Stapley said:

Compared to the residential market, commercial real estate does show some strength with high occupancy rates and “pretty solid” rental incomes in major markets across the country. Commercial real estate also lacks a large oversupply of capacity to work off, [Stapley] said.

While he does not see commercial real estate experiencing anything like the residential meltdown, he told executives [last week] to expect a slow period of new office construction for the next year or so with perhaps a 2 percent to 5 percent decline nationwide and then a recovery in 2009.

“It’s going to be soft,” [Stapley said.]

Define “soft”. Seeing a 20 percent to 30 percent value drop in existing buildings in one of the most expensive markets sounds more than soft to me.

New yardsticks for measuring value need to be implemented. As I have said in the past, you have to look at what buildings are offering. If they don’t include intelligent amenities and broadband connectivity, they will continue to quietly slip in market value as well as occupancy.

In addition to the slump in real estate, more than 300 businesses (including construction companies) in New York alone are also sliding into bankruptcy. This is triple the declaration rate as compared to 2007. It’s the same story in Chicago, though when it is discovered in New York, it seems to get more media coverage.

Construction companies are also becoming more delinquent in their loans in Chicago. Will there be new developments for condos and commercial properties? Don’t count on it in the near future. The whole credit market for everyone has tightened up. It’s not just the sub-prime borrowers. This is a far cry from what some industry pundits declared six to eight months ago.

Is Now the Time to Invest?

In times like these, you also have the midnight TV real estate advisors coming out and declaring that now is a good time to invest in foreclosures. You have seen these infomercials that tell you now’s the time to make money by buying foreclosures. They come out with some formula that they have been pitching for years and tell you how you’re going to make a killing.

Today, there are many more foreclosures popping up than there are qualified buyers. Once you buy a foreclosure to “fix and flip” as a speculator, you may find it difficult to sell it. The mortgage market has tightened up as to who they will finance. As they say, cash is king.

Then there are some “real estate experts” saying now is the time to change over your IRAs and put them into their real estate investments:

If you have IRA funds or other retirement accounts and would like to use those funds to earn a 12 percent return or to buy investment property, then go to our “earn 12 percent page”.

This may not be a good thing to do in this climate of sliding values in commercial real estate. They continue to pitch with this:

As a wise man once said: “Don’t wait to buy real estate. Buy real estate and wait.” Happy investing!

A wiser man says: “Don’t buy into any real estate if it doesn’t adhere to the principle of ‘location, location, connectivity’ because you will be buying into something that’s growing more obsolete and therefore less in value on a daily basis.”

Carlinism: When “market experts” are telling the average investor to invest, chances are they are wanting to sell and take profits.