Commercial Real Estate Jingle Mail

'Tis that time of the season.  As per the linked article from Clusterstock.com LINK, Morgan Stanley has sent an early Christmas present to lenders who financed five buildings owned by Morgan Stanley in San Francisco.  Morgan Stanley has opted to hand the keys and building titles over to these lucky banks and investors (no doubt there's public and private pension money in the debt structure).

We've seen some bullish declarations about the housing and commercial real estate market lately.  The most recent coming from Bill Ackman, who runs Pershing Square Capital, a hedge fund with a successful track record.  Recently Ackman gave a presentation to investors which made some very bullish projections for commercial real estate.  In that presentation he has some very questionable assumptions about the ongoing "strength" of the current economy and for economic growth in 2010.  He characterizes the current economy as being "recovered from recession"  and makes some incredulous assumptions for growth in the retail industry for next year.

Based on all of the data that I look at, it would appear to me that the current economic "boom" has been fueled exclusively by direct Government stimulus in the auto, housing and defense/military industries.  The first two are unsustainable even with direct Government intervention; the latter only with continued support of skyrocketing Government debt issuance by those financing our Treasury auctions.

My hunch is that after the holiday season is over, we are going to witness an unprecedented amount of bankruptcy filings in both the retail industry and the white collar service businesses that tend to occupy urban commercial buildings.  This will not be bullish in any way for commercial real estate, as vacancy rates at shopping malls and metropolitan office buildings will spike even higher.  This doesn't even begin to address the growing inventory of multi-family housing units (apartments/condos).  I can say for sure that in the Denver area several have completed development and are begging for tenants.

Back to Ackman, he has made a huge bet on the post-bankruptcy success of General Growth Partners by taking a huge position in its unsecured debts, which will make him one of the largest shareholders when it emerges from chapter 11.   In fact, just today GGP announced that:  "General Growth Properties Inc., the mall owner seeking to emerge from bankruptcy next year, will consider all offers for the company and may sell shares to the public to raise capital" (LINK).  My hunch is that Ackman, sensing the possibility of holding something no one wants (i.e. GGP equity), designed his presentation to throw lipstick on a pig, right before the pig puts itself on the market like a NYC 11th Avenue Princess of the Night ("GGP will consider all offers." Translation:  "I need a fix, I'll do anything you like for some money").

My bigger hunch, based on the empirical data I look at - plus observing actions of smart, inside money like Morgan Stanley - is that Ackman may end up holding the bag with his equity in GGP, especially if the economy drops off a cliff in 2010, as I suspect it will.  The moral here is that if your favorite financial advisor from Wachovia, Wells Fargo, RBC or Raymond James calls you up to pitch REIT stocks, or even this "hot new stock issue from GGP," hang up the phone and change your number as soon as possible.  There is no doubt in my mind, if the Morgan Stanley jingle mail event is any indication, that Wall Street and insiders, who have already dumped billions of REIT paper into mutual funds and retail investors since March, will devote a lot of resources in 2010 trying to unloading even more commercial real estate onto the investing public.