How and why the mighty are falling
May 8th, 2009April 28, 2009
· Analysis by: Robert Canter
· Analysis of: Opus South Files Chapter 11
· Published at: www.globest.com
Implications
The fact that a well respected usually conservative developer has filed for Chapter 11 protection under the Bankruptcy Code is another chilling example of just how far and deep this economic downturn has affected every corner of the commercial real estate sector.
Analysis
What is surprising about Opus South’s filing for bankruptcy isn’t so much that a commercial developer has gone under, it’s the fact that a Company such as Opus has fallen victim to this particular downturn. What this Opus entity did was surprising given their usually conservative business practices.
What got Opus South in trouble, as pointed out in the subject article, was get involved in residential development in FLORIDA. Why any developer would ever touch the Florida residential market has always been a mystery to this writer. Florida residential development has always been a high risk venture. There is always some new development coming onto the market which offers more or updated amenities. It’s no secret that markets such as Florida, California, Arizona, and Nevada are retirement havens as well as attractions due to the great weather these States offer. There has certainly been large amounts of migration to these areas. That being said, Florida for example has for the past 35-40 years been a boom or bust market for developers.
One of the main culprits of this particular housing market disaster were the vast number of speculators buying to flip properties. Savvy developers should have known this fact, as should have the Federal Reserve and most lenders.
The reason speculators caused such a problem is they helped create a false sense of buyer demand. If a good one-third of the new housing stock was being bought by speculators, the demand side or supply side will appear one-third stronger than reality. Adding to Opus South’s troubles is they can not obtain re-financing on existing commercial projects.
How a predominately commercial developer such as Opus South allowed themselves to get caught up in this mess says more about the weakness of Companies to resist the temptation of short term profits than looking at their long term health.
This writer would bet this is just the beginning of a trend within the commercial sector, as loans mature, and property values decline, and cash flows decrease, its inevitable that some of the largest and most prominent commercial real estate names will be going under for the very same reasons Opus South has.
Some people are still holding out hope that the economy is starting to wake up. That may be, but as anyone involved in commercial real estate will tell you, this sector of the economy is just now beginning to crumble, and there will be a wave of failures, bankruptcies, foreclosures and so forth to come. Adding to the misery is the constant downward spiral of unemployment numbers. This portends further bad news for almost every commercial sector. This includes office properties, as corporations shed their overhead, vacancy rates will be going much higher. Retail some think has reached close to bottom. This writer disagrees, as the state of consumerism is going through a new paradigm shift. Buying habits will be changed for the long run, even if the economy makes a come back of sorts.
What I don’t think analysts take into account, is the psychology of human nature. In addition, Americans are more concerned with debt reduction than buying a new anything, unless absolutely necessary. Add to this that many people’s credit limits have been reduced which will help suppress buying.
As we have been shown by numerous data providers, the gains of the last 4 years have been given back and then some. So I trust the lessons learned once again will not be revisited…but that is not Human Nature.
