The Housing Chronicles Blog: Falling consumer confidence now having an impact on all real estate sectors

Thursday, December 11, 2008

Falling consumer confidence now having an impact on all real estate sectors

It looks like the retail and commercial office sectors of the real estate industry are about to join the funeral dirge that has been the housing market over the last 18 months. So when will each of these sectors revive? From a story:

Another cascade of business bankruptcies in the housing, retail and commercial real estate sectors could happen during the next six to 12 months if consumers' confidence doesn't improve soon, both in terms of the economy and their personal finances.

However, the likelihood of that happening appears slim, based on the dismal assessment of current and future market conditions by three real estate experts during an hour-long teleconference yesterday presented by the American Bankruptcy Institute.

“Asset and price recovery are several years away” for the housing industry, predicts Rebecca Roof, a managing director with the New York-based business advisory firm AlixPartners. During her comments, Roof dredged up the usual suspects behind housing’s deterioration (price appreciation, overbuilding, lax mortgage underwriting), and added another co-conspirator: consumer confidence, or lack thereof...

Consequently, she says, many builders “are just trying to find enough cash to make it” through the downturn, which is why when builders finally decide to file for creditor protection under Chapter 11, “they are really at the point of liquidation." And with so many banks having their own financial and corporate problems, she says “it’s hard to get their attention” to renegotiate debt or new financing...

All three panelists don’t see much immediate improvement for their respective spheres of influence. “Home building is going to be a very tough, wounded sector for many months to come,” says Roof. “We have not seen the bottom yet, and if consumer confidence continues to erode, home building will not enjoy its traditional spring rebound.”

While she doesn’t expect any sustainable recovery for the next 24 to 36 months, Roof says builders’ survival will be contingent on realistic sales projections and asset valuations. “They will need good, early communication with lenders before they trip a covenant, and they need to make sure that all available cost reductions are made in ways that protect banks’ value....

“Home builders will be able to wait out [the recession] if they can negotiate forbearance with lenders,” says Roof. However, she also thinks that “a lot” of small builders will eventually liquidate, which would open the doors for developers with cash to pick up land bargains.

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