Tuesday, June 9, 2009

The Demise of Commercial Real Estate - How to Play it

The demise of commercial real estate will be slow, painful and certain. And many of us have played and/or held SRS, to a fault, anticipating this event. We all know it is coming, but we jumped in too early and held too long if you did not get out before early March. After the crash in October, commercial real estate has had a bumpy ride but IYR and the regional bank ETF, KRE have had a nice move up, while SRS has slowly and steadily fallen since early March, party due to decay.

BTW, the picture above was taken by me (sorry for the blurriness of my camera phone). Click on it to get a really good view of where commercial real estate is headed. I was driving down one of the busier roads in a city nearby and this strip mall caught my eye. It is completely empty. Nothing but weeds growing in the parking lot. Not even a For Lease sign in the front. All hope was given up on this little piece of commercial real estate. It has been there for 1 1/2 years and never had a single tenant.

OK, back to the purpose of this article. SRS may turn out to be a good play but as we all know, holding it long term in its depressed state will just lead to decay until it eventually does turn around.

Another way, and clearly a less risky way to play commercial real estate is to short the IYR ETF. This is obvious for anyone understanding ETF's and I won't go into a long explanation on why this is a safer play. But the problem is, technically, IYR does not appear to be a good short. See the chart below and notice that the 20 day MA is still well above the 50 day MA and the stock price is above the 20 day MA. Therefore, it is in a bullish trend. It may be peaking here, but too many traders have lost a lot of money trying to time the top. So you really need to wait for the technical indicators of first, the price go below the 20 day MA, and second, the 20 day MA crossing the 50 day MA.

So, for now, IYR is not a good short candidate.

But, I found this gem the other day and have been watching it and reading about it and thought, well dagammit (that's southern for, "gee wiz"), this may be a darn good way to play commercial real estate short. And tonight while listening to Bloomberg, an analyst described why this gem is a great way to short commercial real estate and as he described exactly what I had been pondering, it gave me goose bumps.

The play is to short KRE. KRE is the regional bank ETF and there is nothing with more exposure to commercial real estate as a percentage of their business than regional banks. The big banks have a lot of exposure to commercial real estate but they also have a wide variety of money making businesses to offset their CRE losses. But regionals do not. Some regionals were built on CRE. And as CRE crumbles, so will these regional banks. We have already seen this over the past couple of months but there will be more to come in the next 12-18 months.

Look at the chart below. KRE is already met my two criteria for clear indication of a short play. It crossed the 20 day MA and the 20 day MA has crossed the 50 day MA. A very very bearish indicator.

So rather than dealing with decay and time constraints, if you want a really good long term play to short CRE, short KRE or play some long term puts. Shorting IYR will be next but I will wait for technical signals before jumping on that.


  1. the bulls have 3 weeks of life left

    window dressing...holding on by a prayer...

    end of june = LOAD the boat w/ puts (spg)

  2. It looks like a good play, Brian. In the same vein, I recently bought long-term FAS puts. On KRE, what strike and month are you looking at?

  3. I am really looking at shorting KRE shares. But I am eyeing the Sept 15's. Notice, I am not first in line as the open interest on the Sep 15 puts is very very heavy.

  4. I'm not sure I agree w/shorting financials. Hasn't the administration already proven that it pays to fail?

  5. regional banks are a different business than the mega conglomerates which are highly diversified money makers. The regionals, as a whole, have a very large exposure to commercial RE. I would not touch any of the financial ETF's which are centered around the mega banks.

  6. Hi Beamer Dog,

    Thanks for this KRE short, the photo, the comments, and the links to some good articles.

    It's so sad, scary, frustrating, and infuriating what has happened to our country.

    Best wishes to you and yours.

  7. Cramer on Friday rec'd HBAN and says regional banks are the way to go. ???

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