By Chip Hanlon 

I guess it could be said that virtually every day is a day for real estate industry folks to tell us why the bottom is near, but I just happened to be up extra early (for a West Coast-er) and from about 3am on, our time, saw 3 different experts dismiss the things taking place in real estate and credit markets.

These were actually really savvy folks so I listened with interest, but I respectfully had to wonder about a couple of the points that stuck out.

First, one of the guests emphasized the point that cap rates in U.S. commercial real estate never reached worrisome levels.  I really wonder about this one.

A "cap rate" is essentially the measure of the cash flow an asset produces and is the primary way corporate real estate deals are benchmarked.  For example, if a $1MM building generates $100k in net cash flow, then its cap rate is said to be 10%. In other words: the lower the cap rate, the lower the expected return (or, the more you are truly paying for that asset).

Over the last couple, most wildly bullish years in real estate, cap rates were being driven to the ground-again, making corporate real estate very expensive-particularly by publicly-traded REITs. It was not at all uncommon to see cap rates right near 5% for apartment deals, and only slightly higher for other types of commercial transactions.  Near-Treasury rates for the risk of investing in real estate?  That is the very definition of expensive.

 I know all sorts of long-time real estate developers around here: those who embraced the new world and kept playing are now reportedly struggling to just hold onto their properties (these types of folks are usually pretty highly leveraged in their own right).  On the other hand, the smartest among them were consistently walking away from deals last year, saying they just couldn't make sense of some of the prices REITs and other buyers were paying.  Cap rates are going to have to go back up this year; indeed, the trend has already started, which means many recent buyers clearly paid too much, explaining some of the ongoing risk in corporate real estate-beware, REIT investors.

The other risk associated with such skinny cap rates is that a holder has a lot less protection from a recession and the decreased cash flows (rents from businesses) which result.  In catching a drink with a close pal of mine a few days ago-a high-ranking risk management specialist with one of the world's largest financial institutions-I am convinced corporate real estate is indeed going to catch the real estate flu this year, and economic slowdown/recession will be just one part of that.  This friend mentioned, interestingly, that in their work credit problems have always developed in the following patter when lead by residential real estate: consumer credit becomes troubled next (already underway), followed by corporate real estate as a derivative of the first two.

The second point that troubled me this morning was this: one guest suggested that the sub-prime credit woes are primarily a U.S. phenomenon. We know this is incorrect as we have seen problems emerge in banks and money market funds in Europe, but with regard to real estate specifically, just read this story , for example.

Translation: funding for corporate real estate is getting tighter, and it's getting tighter worldwide... it is plain as day (and that link represents a very important story, in my opinion).  Listen, we advise on a significant real estate portfolio and would love to say things are rosy; I do believe that financials and many real estate holdings will represent outstanding buys in coming months, but we just have a little more pain to live through first, I believe.

And the pain isn't over on the residential real estate front, as I wrote recently (I believe the analysis here to remain valid).

Again, those CNBC guests I'm referring to were not cheerleaders from the National Association of Realtors, they were savvy pros.  That said, I think their optimism toward corporate real estate is a bit premature.