If there’s a silver lining in Stockton’s housing crisis, it’s that affordability has meant a return to some semblance of normalcy in the housing market. Blower says half of the people he sees buying homes today are investors, while the other half are first-timers who wisely sat out the bubble and saved their money. “There are a lot of couples who thought they’d never be able to buy a house three years ago who suddenly can today,” he says. “I’m seeing a lot of all-cash offers from them.”
Still, the damage has been done, and the repercussions will continue to be felt for a long time. In recent months many banks have abided by a moratorium on foreclosures, but that is about to end. The result, says Blower, will be hundreds of additional properties dumped onto the market.
But as everyone knows now, America’s recession has spread far beyond the world of residential real estate. As Wiley Chandler, who anted up the winning penny at the Stockton courthouse, puts it, “Everybody had money, everybody was refinancing their houses. Little guys, big guys, they were all spending it on everything. And now nobody is spending nothing.”
Nowhere is that more apparent than the commercial wastelands forming around Sacramento.
When Oprah Winfrey aired a segment on a tent city full of homeless people in Sacramento in late February, it touched off an international media storm. Here, in the capital of California, was one of the most glaring symbols of the recession. Since then, reporters from every continent have flocked to the sprawling site, set beneath power lines and next to an almond factory. The fact is, though, most of the residents here, like Rico Morales, the self-proclaimed mayor of the tent city, have been homeless for years. “This is my home, it’s not a mansion, but it’s organized,” he says, adding that he’s been homeless since he was 13. “When the mayor [of Sacramento, former top NBA-player Kevin Johnson] gets off work, he wants to go home, have a coffee, watch some TV. We’d like the same thing, but unfortunately we can’t.”
But while the sudden media attention given to Sacramento’s tent city has shone a much-needed light on the long-term problems of homelessness in America, there’s another U.S. crisis playing out that could prove far more crippling to the global economy. And signs of it are evident 20 km south of Sacramento, in the city of Elk Grove.
In 2005, the U.S. Census Bureau crowned Elk Grove the fastest-growing city in America—although, astonishingly, until 2000 it didn’t even officially exist. In just one year, the population exploded by 12 per cent to 112,000. With home builders racing to erect whole new subdivisions overnight, their counterparts in the world of commercial real estate launched a tidal wave of new strip mall and office building projects for the growing population to shop and work in.
Today, if you drive a few minutes into the countryside, you can see where that wave broke. A skeleton of steel beams and aluminum roofing rises out of the weeds, the remnant of a highly touted 130-acre shopping mall (the owner of the project, General Growth Properties, is one of America’s largest developers, but is struggling to stave off bankruptcy). Several car dealerships have gone bust, luring gangs who tag them with graffiti. Whole strip malls sit empty. A cook at a Chinese restaurant sits outside smoking a cigarette during lunch hour because there are no customers to feed. “People aren’t going out to eat anymore,” he says. Several restaurants, such as Chili’s, have closed. The commercial vacancy rate in Elk Grove and other cities around Sacramento has topped 30 per cent. Analysts expect it to rise further.
It is, of course, a similar story all across the state. In Silicon Valley, the area to the south of San Francisco dominated by the technology sector, offices within blocks of the massive Google campus are crying for tenants. Even the most exclusive shopping districts in California are struggling. From Rodeo Drive to Melrose Place, luxury boutiques that just a year ago were considered “recession-proof” have closed. Tracey Ross, whose eponymous boutique in West Hollywood served celebrities like Kate Hudson, shut down her store in January. “When wealthy customers who can afford to pay retail are getting 80 per cent off at Saks, it makes it impossible for smaller boutiques to compete,” she said at the time.
What does it matter if the world has a few less J.Crews or Bed, Bath & Beyonds? Many experts say commercial real estate is the next domino to fall as a result of the U.S. recession. If it does, those banks and institutional investors that managed to dodge the housing crash, including those based in Canada, could face even more staggering losses.
Consider the nondescript three-storey red brick office building a half-hour up the highway from Elk Grove in the city of Roseville. It’s the kind of structure that crowds most business parks. But, said one mortgage banker in Sacramento who asked not to be named, the giant Quebec pension fund, Caisse de dépôt et placement du Québec, could face millions of dollars in losses on this one building alone. Through its real estate financing subsidiary CWCapital, which manages US$11 billion in assets, the caisse is exposed to the high-risk portions of a US$10.5-million securitized loan on the property. But the banker says a third of the building sits empty and the developer has stopped making loan payments. Given the tumbling value of commercial property in the region, he estimates the building is worth half the loan amount. “They [the caisse] don’t know what’s coming,” says the banker.
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