The recent bankruptcy filings by the $2.4 billion Atlantic City, NJ casino Revel should be an eye-opener for those who continue to insist that a "recovery" is underway - especially in the commercial real estate market.
From "NewJerseyNewsRoom.com":
Operators of the $2.4 billion Revel casino, which opened last April in Atlantic City, announced plans last week to file Chapter 11 bankruptcy in late March. The bankruptcy will help reduce its more than $1 billion debt and allow it to keep operating, reported MSN MoneyNOW.
According to the Star Ledger, the casino resort was an attempt to turn around Atlantic City’s staggering fortunes and keep gamblers from continuing to flock to casinos in neighboring Pa., which last year surpassed N.J. as second-largest gambling center in the U.S., behind Las Vegas.
New Jersey Gov. Chris Christie hailed the resort as a “game-changer” and it was therefore provided with $300 million worth of aid by the state. But he couldn’t have been more wrong.
New Jersey Gov. Chris Christie hailed the resort as a “game-changer” and it was therefore provided with $300 million worth of aid by the state. But he couldn’t have been more wrong.
The casino did not transform Atlantic City’s struggling gambling scene as hoped, instead it has performed poorly over the past 11 months. In January, Revel generated less than $8 million in casino revenue, ranking it last among the city’s 12 casinos, according to state data.
According to News 12 New Jersey, the pre-packaged bankruptcy will wipe away more than $1 billion of its debt by converting more than $1 billion of it into equity for lenders.
From in between Stamford, CT, where I reside, to New Jersey, I see large swaths of commercial real estate that either long been shuttered, currenly going out of business, or quite often the case, struggling to retain business and merely present convey a feeling of comfort and stability.
Perhaps the most paradoxical element of these observations is that new commercial real estate continues to be built - either in the form of strip malls, office buildings (in the suburban areas), or more expensive top-grade commercial space (in the case of New York City). It appears that commercial real estate developers and owners have taken it in the chin twice - first, during the onset of the Global Financial Crisis in 2007, then once again from 2010 onwards.
But there are two primary reasons for this, which together explain how the real-estate market is continuing to undergo distortions and disolocations from the "real" market that can only produce staggering tragedies such as the Revel casino. Firstly, many developers had expected a typical cyclical recession in 2009 that would quickly subside in several years. They therefore viewed the low prices at the time as an opportunity to create tidy profits in the coming years as the market recovered. Unfortunately, it appears that they held the artificial "stock market" in too high a regard and did not examine the "real" market for goods and services which did not exhibit such a favorable prognosis.
Secondly, governments and politicians who have been proclaiming a "recovery" have been quick to introduce stimulus measures and tax subsidies for these projects, which only serves to exacerbate the plight of the entire market. After all, commercial real estate participants who have not been sufficiently "lucky" or "qualified" (both read: connected) to receive political or government support will witness a transfer of their fortunes to those who have.
We unfortunately will see this game played for a long time along the Malthusian plateau of sustainability as hungry developers increasingly compete in the ferocious circumstance of an evaporating waterhole occasionally watered by a political waterhose.
Copyright © 2013, Srikant Krishna
Srikant Krishna is a financial technologist and quantitative trader. He has a background in biophysics, software development, and the capital markets.
You can follow him on Twitter @SrikantKrishna, and on LinkedIn at http://www.linkedin.com/in/srikantkrishna/, or e-mail him at sri@srikantkrishna.com.
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