Bad Loans – The Second Wave Cometh

While so much emphasis has been stressed on the bad mortgages and home-loans, another wave of bad loans is coming.
Before I elaborate, let me quickly summarize. There was excess liquidity in the market, money was made available to almost anyone, people started getting 2nd and 3rd mortgages (when they really could not afford more than one). As everyone was out hunting for properties to invest, home prices soared. Wall Street got into the action. Hedge funds, money market funds, and God knows anything that could be carved out of such a booming-liquid-money-house-based-mortgage-lending-economy, was carved. The bubble burst. Then the downfall happened of which we all know about.

I am no economist – not even close. But for over 10+ years, I’ve kept a VERY close eye on a very specific segment of commercial real-estate: data-centers.

As more and more people get laid off, companies will continue to cut down costs. As costs are cut down, office/building expansion, etc. are also cut down. When people are out of a job, credit card defaults are bound to happen. When people don’t spend money, commercial businesses will get hit… and that is the Second Wave.

Soon enough you will see a lot of commercial building loans go into default. Right now we’ve been seeing home-loans gone bad, I bet you will be seeing commercial loans go bad pretty soon.

For any reversal of fortune, the first step is the slowdown, which we have already experienced, the send step is the stopping – which we are experiencing right now. The third would be the reversal itself. This I believe has started quietly. Nothing big yet, but this commercial default snowball is now becoming bigger and bigger.

Datacenters expansion by Google and Microsoft for example have been stalled. More and more emphasis is being applied now to pack more servers/gear into the same available space (blade servers, cloud computing, etc.)

Go-green options are huge. Large datacenters can get connected to grid in excess of 50Megawatts. Some exceed 100Megawatts. All signs and indications right now in the commercial datacenter markets is of a steep slowdown. Those with a lot of liquidity, are on a buying spree to grab land which is being offered at an unprecedented low rate. As we are now an electronic economy, this commercial vertical is seeing a lot of consolidation happen. The real-world brick-and-mortar companies are shuttering down a whole lot faster than you and I can fathom. Circuit City – gone bust! More and more are coming. Coffee sales at Starbucks have gone down significantly – imagine what the neighborhood coffee shop is experiencing. Casinos are laying off people. Which in turn affects the rental market in Las Vegas, which affects the new housing projects that are coming up – when the market goes under, a commercial default is imminent.

Look at all the advertisements of all the grand-land projects that use to come out in Dawn. All gone now. No more double-full page advertisements. All gone. Come to think of it – I hardly see any new tower coming up. Those that are already in the build – have slowed down. The Centaurus in Islamabad is in trouble. So is the Grand Hyatt Project in Islamabad. By trouble – it’s always financial. Commercial office and residential projects in Karachi are equally affected. Whatever happened to Emaar’s expansion plans – on hold I bet.

Year 2009 is not going to be easy by any ways or means. For Pakistan, it will be a whole lot tougher. Water shortage will have a serious impact on agriculture this year. Note it down. I will revisit and put a “told-you-so” in the comments a few months from now. Electricity woes will be almost unbearable come this summer. A lot more projects within Pakistan will be facing serious crisis as the months progress. I wish I had some good news, but the fact of the matter is – people are just not prepared for the storm that is coming.

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