Hitting bottom, a case for optimism

The zeitgeist feels gloomy, so Random Walk brings cheer from commercial real estate: the bottom is near (maybe)

• foreclosures rising . . . and that’s good

• ending a losing streak

• if you’re in a hole, stop digging

• it’s good to be prime

• feeling industrious is the Bay Area

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Hitting bottom, a case for optimism

There’s a lot of negativity in the air for reasons one can only speculate.

Consumers are being more cautious, the labor market is increasingly stagnant, and the ISM manufacturing index came in cold. My guess is that today’s jobs release will disappoint.

None of this is new information however—all of these trends have been running for the better part of the year—but perhaps it’s taken longer to sink in? Is it the carry trade unwind? Or maybe the big sell off is driven by other things entirely.

Anyways, when the zeitgeist zigs, Random Walk zags, so we’ll end the week with a bit of hopeful data: good news from commercial real estate.

Has commercial real estate finally hit bottom? Random Walk isn’t sure, but there’s definitely some signs.

Foreclosures rising . . . and that’s good

The WSJ actually just ran a story Surge in Commercial Property Foreclosures Suggests Bottom is Near, so we’ll start with that.

Normally, you’d see a chart like this and say “ahh, the sky is falling!”

WSJ

Foreclosures are on a steep upward decline.

Banks and other lenders are seizing control of distressed commercial properties at the highest rate in nearly a decade, a sign that the sector’s punishing downturn is entering its next phase and approaching a bottom. In the second quarter, portfolios of foreclosed and seized office buildings, apartments and other commercial property reached $20.5 billion, according to data provider MSCI. That is a 13% increase from the first quarter and the highest quarterly figure since 2015 . . .

So why exactly is a parabolic increase in foreclosure activity a good thing?

The WSJ explains:

Until recently, though, many lenders have been reluctant to take over properties in hopes of a recovery and to avoid the expense and losses of foreclosure actions . . . [But eventually] lenders conclude that obsolete office buildings won’t recover their former value, even when interest rates decline. That is leading to sales of foreclosed properties and distressed mortgages. It is also bringing an increase in short sales, where lenders and borrowers work together to unload troubled property for whatever they can get . . . in previous downturns, comparable surges in foreclosure activity has signaled the approach of a market bottom. Once lenders seize a property, they are typically quick to sell it, a process that helps determine values of properties

The idea here is that banks won’t foreclose, if they think there is still some chance that values will recover.

Once they do foreclose, yes, it means that lenders have given up hope, but it also means they tend to sell soon after, and that leads to price discovery, and that leads to inkling of a price floor.

See, hope abounds.

So is there a price floor?

Maybe, could be, according to MSCI: