While having lunch with my mother yesterday, she told me she’s never seen stores and malls so empty. And she should know – shopping is her favorite pastime.
But you don’t need the keen insights of Mrs. L. to know that the retail sector is struggling big-time. Many malls and shopping centers have more vacancies than they’ve ever had.
With unemployment headed towards the double-digits and the personal savings rate quadrupling since 2007, this is hardly surprising. There’s simply a lot less money sloshing around the retail sector. And this is having a negative trickle-down effect on a couple of other sectors… Commercial real estate is in trouble. Perhaps more trouble than the housing market was when it started its slide. Consider this:
Delinquencies in retail office space have doubled over the past six months. And they’re up 80% in apartments and industrial buildings.
Commercial loan delinquencies have risen from 1% to 5% in the past year. General Growth Properties (Pink Sheets: GGWPQ), second-largest mall owner in the U.S., recently became the largest U.S. real estate bankruptcy in history.
Simply put, commercial landlords are in a jam. With fewer customers patronizing their properties and major tenants closing up shop, there aren’t many options to improve their businesses. After all, it’s not easy to replace a big-box retailer like Circuit City. And the loss of that store leads to declining traffic at the other retailers in the mall.
Retail Sector Decline Means Big Trouble For Little Banks
The decline of the retail sector isn’t just hurting commercial landlords… regional banks are taking it on the chin, too.
This is because many local commercial landlords use smaller regional banks for their borrowing needs – and these banks are enduring huge levels of delinquencies and defaults. Many are not likely prepared for the tidal wave about to hit them.
This year alone, more than $200 billion in commercial real estate loans will come due. That number balloons to $1 trillion when you include the next few years. It’s likely that many of the borrowers won’t be able to pay back the principal when it’s due, or be able to refinance the loan. That spells trouble for the banks.
In yesterday’s column, I wrote that I believe investors should sell stocks and take profits now, in anticipation of the market making new lows.
Today, I’ll show you how to make some money during the decline, by focusing on commercial real estate and the regional banks.
Profit Play #1: The Commercial Real Estate Downturn
For traders, consider the UltraShort Real Estate ProShares (NYSE: SRS). This ETF doubles the inverse performance of the Dow Jones U.S. Real Estate Index. So if the index declines by 2%, SRS should rise by 4%.
Alternatively, if the Index climbs by 4%, SRS should take an 8% hit. It’s a good way to go short on real estate without actually shorting stock. And because SRS has an inverse relationship with the index, you actually buy it. No shorting required.
If you prefer the options market, you can buy calls on SRS or buy puts on the iShares Dow Jones U.S. Real Estate Index (NYSE: IYR), another ETF whose performance corresponds to the price and yield of the Dow Jones U.S. Real Estate Index.