On April 12, 1959, John F. Kennedy said in a speech in
“When written in Chinese, the word crisis (weiji) is composed of two characters. One represents danger, and the other represents opportunity.”
Since then, the paradox has entered our sensibility and has been used by Richard Nixon, Condi Rice, Al Gore, Homer Simpson’s kid Lisa, “The Tao of Pooh” and numerous financial analysts when looking through New Age-tinted lenses at troubled financial situations such as the banking Chernobyl. More recently, it’s been applied to the pending foreclosure crisis in commercial real estate.
Kennedy’s explanation may be brave and inspiring, but it is as wrongheaded as a two-headed snake. Indeed “wei,” the first character, means “danger.” But the second character, “Ji,” is much closer in meaning, according to
For REITs, however, it applies, because the current foreclosure crisis has at least as much to do with danger as it does with opportunity.
For REIT investors, the moment of the true weiji is upon us, and hard questions will serve better than opportunistic buying. Will there be a rising tide of foreclosures which offer opportunities or will refinancing enable properties to hold out until the economy recovers?
Commercial Vs. Residential
Investors have to remember that REITs primarily deal with commercial office buildings, and not the more familiar residential home market. There are similarities: Both markets have experienced a wave of foreclosures and falling prices, and in both there are experts calling for a sharp recovery.
But the similarities end there. The economic forces that caused the foreclosure crisis in the commercial market are different from those that caused it in the residential market. The subprime lending crisis eviscerated residential real estate, bursting a bubble built on false underwriting and aggressive easy-money policies typified by the so-called NINJA (No Income, No Job Application) loan.
That didn’t impact commercial real estate, at least not as much. Rather, it was the fallout of the residential downturn that hurt commercial REITs. As the subprime crisis sent the financial sector into a tailspin, the consequent banking crisis sent the dominoes of a strangled credit market, massive layoffs, credit card debt, and a broke and nervous consumer economy into chaotic free fall. Occupancy rates in the commercial sector tumbled, and the short-term credit markets that commercial REITs rely upon to survive froze up entirely.
As the economy recovers, the residential market may improve first, as families strive to put roofs over their heads, take advantages of low housing prices and consolidate their incomes before they consider investing. The commercial market will recover later—after credit loosens, companies begin to hire and newly solvent consumers have the buying power to head to the shopping malls and take vacations.
With many betting on a long-term economic recovery, investors are asking whether now is the time to get back into REITs. Some are even suggesting that aggressive REITs in certain segments of the market can capitalize on the current weakness, taking advantage of foreclosed properties to acquire profitable properties.
Should investors jump aboard?