Commercial Real Estate a Mature Industry?

I read a good post from Mike "Mish" Shedlock this weekend about the commercial real estate market. It reinforced my hunches about the status of this industry and business model.

Mish said it beautifully: "Does the Shopping Center Economic Model Work?" His answer (and mine) are a resounding NO. There are a number of factors that work against retail stores and big shopping centers. Let me count the ways:

1) Rising Energy Prices. This is a double-whammy to retail store/mall owners. First, the rising cost of energy increases the store's utility costs and overhead, which has to be passed along to customers. Second, it costs more for families and individuals to drive the car or SUV to the shopping center. Unless that mall or store is close to where someone lives, its doubtful many folks will want to drive a long ways to shop.

2) Time. It seems life is busier today than it was even five or ten years ago. People don't seem to have the free time they used to. Even if they can afford to drive halfway across town to shop at their favorite mall or store, they may not have the time or energy. And when you're in the store, it may be understaffed, which can result in long lines and wait times to get checked out. Not to mention talking with retail store staff who generally know less than you do about the products. This makes the option of shopping online more appealing, which brings me to my third reason:

3) The Internet. Shopping sites such as Amazon, eBay, Overstock and many others give consumers options that weren't available 10 or 20 years ago. And why it new from a store, when you can buy it used at a discount... from the comfort of your office or home? Point, click, done.

4) The Hassle. I'm a 30-something single guy, and I hate going to shopping malls and stores - especially during Thanksgiving or Christmas. There's too many people, it takes too much time, and I'd much rather buy online or from a less crowded store. Now, I know some people (usually women) who love to engage in what they call 'retail therapy.' Bully for them. But it's just not my cup of tea.

It's not all negative for retail stores. I think most Americans still prefer to look at, feel and try on clothes before they buy. But as a viable business model, I think the mega-malls and shopping centers have matured, and may eventually go the way of the dinosaur. It may take a decade or two, but I believe more transactions in the US and around the world will be done online.

It just makes sense. Why spend tens or hundreds of thousands of dollars to start and maintain a brick-and-mortar facility, when you can spend a fraction of that amount on a virtual, online storefront? If you have a phone, fax, e-mail and merchant accounts, and a website that can take payments online, you're in business.

You can start an online business from a small studio apartment or home, instead of a physical store - where you have the potential threats of fire, theft, and vandalism. Instead of selling a physical product or service, you can sell information - which has low costs, and high profit margins.

These are the reasons why I believe commercial real estate (specifically shopping malls and retail stores) are at a plateau, if not on the down part of the Bell curve. Just like with stocks or commodities, the trend is your friend. And these trends are a lot friendlier to Information Age-type businesses, vs. stores from the Industrial Age.

Paulson Didn't Listen...

Just as I ended yesterday's blog post asking Ben, Hank and the boys to get heck out of the way, they just couldn't leave well enough alone. I should have known better... it is an election year, and they have to throw some bread to lower and middle-class Americans, while the circuses of reality TV and pop culture entertain them.

My suspicion is that it'll help financial firms like Merrill Lynch and Bear Stearns with the valuation of these bundled and sold mortgage 'investments' (and I use that term very loosely), and improve how they look on their books - maybe for another quarter or so. But it's only a short-term Band-Aid that may prop up the public's confidence in the mortgage market.

And confidence is the only real 'collateral' that investors have with financial paper assets. History shows that once the public loses confidence in a paper asset, it takes a long time to get that confidence back. One example is the Dow Jones Index, which basically broke even in nominal terms from 1929 to 1954, and actually lost ground against inflation.

Other paper assets, such as Enron stock, will have a loss of confidence and never get it back again. That's why I'm very bullish on precious metals and commodities over the next few years to a decade. Gold is a good buy, but silver is still a GREAT buy - even at $17/ounce. Gold and silver-mining shares (and the physical metals) are the best places for your money. Metals markets can be very volatile, but don't let that scare you.

All markets - whether they're stocks, bonds, or commodities - will be pretty volatile in the next few years. Tangible assets will NEVER go down to zero, like a share of a dot.com stock can. And the Fed will keep increasing the money supply, with a larger number of dollars chasing the same number of commodities. That's the biggest reason I'm bullish about investing in these markets, and you should be too.

Is the Credit Crunch Growing?

We've all known for several months about the sub-prime/ARM mortgage debacle, and how it's forced lenders to tighten their standards. Better late than never, I guess.

Now we're seeing a reduction in lending with credit cards. Exhibit A is the British Internet bank, Egg, withdrawing credit to 161,000 customers it believes pose an 'unacceptably high risk.' Peter Schiff, head of EuroPacific Capital, also sees credit-card lenders in the US ratcheting up their standards after seeing their profits go down, and their stocks downgraded.

As I've said before on this blog, excess credit and speculation have been the two main drivers of the dot.com and real estate manias - and ultimately, the US Economy. Once the credit begins to contract, the overall economy will follow suit. If you understand the fundamentals of Austrian Economics, it's pretty easy to predict. If you don't know these fundamentals, get up to speed on them as soon as you can.

Go to: 321Gold.com, Financial Sense Online, Prudent Bear, Daily Reckoning.com, and Kitco for starters. If you just want entertainment, eye candy, and escapism from the real business and economic world, go to Fox Business News or CNBC. Liz Clayman and Erin Burnett are definite hotties.

Where was I at? Oh yeah, credit and the economy. It was inevitable that we'd come into a recession because of low interest rates, easy credit, and the increase in money supply. The yin and yang of business cycles, if you will - whatever goes up must come down. It should be common sense... you can't just borrow and spend your way into prosperity.

If we're not in recession already, it's not very far away. The skyrocketing foreclosure rates around the country, and the emptier bars and restaurants I see in the Denver-metro area indicate the economy is slowing down. Last week's ISM non-manufacturing index number confirmed this suspicion as well.

It doesn't matter what kind of stimulus package Congress or the President passes, or how low the Fed pushes interest rates. The only cure for this credit-induced party, is an extended recession that will probably last several years. My hope is that Americans eventually realize that government intervention in the economy (and any other part of society) isn't the answer to our problems, but the cause of them.

Get Paulson, Bernanke, Bush, and the whole crew out of the way, and let the financial hangover begin.