From Businessweek:

Dallas-Fort Worth

Rank: 1
Price/rent ratio: 3.76*
Median per unit sales price: $30,000
Median rent: $720/month
Vacancy: 7.6%

Pros: Investors in the Dallas metro market can earn the highest rental income for the least amount of investment. 
Cons: Dallas-Fort Worth has a tendency to have large waves of apartment construction, which can rapidly increase competition and push up the vacancy rate.

*The ratio represents how many dollars of investment will generate $1 of rental income. The lower the ratio, the cheaper the apartments are in terms the rental revenue. The national price/rent average is 8.19.

Cleveland

Rank: 2
Price/rent ratio: 3.94
Median sales price: $31,000
Median rent: $701
Vacancy: 6.4%

Pros: Solid rental income for cost of investment.
Cons: Rising unemployment and generally weakening economy.

Detroit

Rank: 3
Price/rent ratio: 4.00
Median sales price: $34,000
Median rent: $765
Vacancy: 7.4%

Pros: People are staying in apartments because the foreclosure-heavy for-sale home market is increasingly risky.
Cons: The economy, heavily dependent on the automobile industry, is crumbling as unemployment spikes.

Cincinnati

Rank: 4
Price/rent ratio: 4.15
Median sales price: $34,000
Median rent: $671
Vacancy: 7.3%

Pros: Steady market with a limited supply of new apartment construction.
Cons: Job losses, particularly in manufacturing and trade/transportation/utilities sectors will curtail apartment demand over the next year.

Houston

Rank: 5
Price/rent ratio: 4.52
Median sales price: $35,000Median rent: $718
Vacancy: 10.1%

Pros: Strong employment growth over past decade; many major corporations headquartered here.
Cons: Dependent on oil market, which has weakened. Relatively high vacancy rate.

Charlotte

Rank: 6
Price/rent ratio: 4.85
Median sales price: $38,000
Median rent: $714
Vacancy: 8.5%

Pros: Several years of steady economic strength, rent growth, and relatively low vacancies—plus it's a major college town. The market could do well in the long term.
Cons: The local economy of this banking hub has suffered greatly since the financial crisis began. Layoffs and unemployment are on the rise.

Jacksonville, Fla.

Rank: 7
Price/rent ratio: 5.17
Median sales price: $41,000
Median rent: $757
Vacancy: 12.7%

Pros: The city continues to attract retirees, and the job market benefits from the development of the nearby naval station. The area is also home to several universities, including Jacksonville University.
Cons: The financial sector has been hit hard in recent months and values of apartment buildings have been declining as vacancies climb.

Kansas City, Mo.

Rank: 8
Price/rent ratio: 5.19
Median sales price: $37,500
Median rent: $656
Vacancy: 8.2%

Pros: New apartment construction has been limited, which has kept supply in check.
Cons: Job losses have been rising along with apartment vacancies.

Columbus, Ohio

Rank: 9
Price/rent ratio: 5.43
Median sales price: $38,000
Median rent:$636
Vacancy: 8.3%

Pros: Columbus is home to Ohio State University, the nation's largest campus. The college creates a steady flow of tenants.
Cons: The local economy is weakening and risks for landlords are increasing outside the student zone.

St. Louis

Rank: 10
Price/rent ratio: 5.43
Median sales price: $41,000
Median rent: $685
Vacancy: 8.2%

Pros: New construction of apartments is limited.
Cons: Unemployment is increasing. More than a thousand layoffs were announced as a result of the recent takeover of Anheuser-Busch by Belgium-based InBev.

Minneapolis

Rank: 11
Price/rent ratio: 5.43
Median sales price: $56,000
Median rent: $901
Vacancy: 4.7%

Pros: The city is home to the University of Minnesota—a steady source for tenants. The metro has good long-term prospects because of its diverse employment base.
Cons: Home of Target and many financial companies, the city is seeing its economy soften.

Philadelphia

Rank: 12
Price/rent ratio: 5.49
Median sales price: $61,000
Median rent: $986
Vacancy: 6.1%

Pros: The city has a relatively stable economy with many universities and hospitals. It is also the sixth-largest city in the U.S. with the fourth-highest gross domestic product.
Cons: There have been some job losses, particularly in manufacturing and professional/business services sectors. Vacancies have increased and this trend is expected to continue throughout the year.

Milwaukee

Rank: 13
Price/rent ratio: 5.68
Median sales price: $52,000
Median rent: $797
Vacancy: 4.3%

Pros: There is a limited amount of new construction and vacancies are low.
Cons: Significant job losses this year could reduce demand for apartments.

Boston

Rank: 14
Price/rent ratio: 6.12
Median sales price: $113,000
Median rent: $1,644
Vacancy: 6.4%

Pros: A major real estate market with many universities and strong rental income.
Cons: The city has had job losses, especially in the financial services sector.

Indianapolis

Rank: 15
Price/rent ratio: 6.15
Median sales price: $43,000
Median rent: $635
Vacancy: 8.2%

Pros: Stable apartment prices and relatively strong job market.
Cons: New apartment construction has accelerated.

Orlando

Rank: 16
Price/rent ratio: 6.40
Median sales price: $57,000
Median rent: $824
Vacancy: 9.9%

Pros: Growing population and good long-term demographic trends.
Cons: The hospitality industry has been hit hard and Disney World has been laying off. Owners of unsold condos have been competing with traditional apartments for tenants.

Chicago

Rank: 17
Price/rent ratio: 6.52
Median sales price: $73,000
Median rent: $992
Vacancy: 6.0%

Pros: The Chicago area has seen steady long-term rent growth and provides good rental income for a large market.
Cons: The Chicago financial industry has suffered job losses. New construction of apartments has continued.

Tampa-St. Petersburg

Rank: 18
Price/rent ratio: 6.56
Median sales price: $57,000
Median rent: $798
Vacancy: 9.3%

Pros: New construction of apartments has slowed.
Cons: Weakened job market. Condo owners who are unable to sell homes are competing with apartment owners for tenants.

Washington

Rank: 19
Price/rent ratio: 6.57
Median sales price: $97,000
Median rent: $1,306
Vacancy: 5.9%

Pros: D.C. is one of the nation's few economic bright spots because of its federal government and defense contractor jobs. Apartment building values are holding steady.
Cons: The northern Virginia suburbs, which have an oversupply of apartments, are getting hit harder than the urban core as vacancies rise and unemployment grows.

Fort Lauderdale

Rank: 20
Price/rent ratio: 6.74
Median sales price: $78,000
Median rent: $1,038
Vacancy: 7.1%

Pros: Vacancies are relatively low; the location will continue to attract retirees and others who enjoy the warm climate and the beach.
Cons: Job losses, unsold homes competing for tenants with apartment buildings, condos being converted into rentals.

Instead of blogging, I thought these links would speak for themselves.

House As Shelter, Or Burden? (economist.com)
US Foreclosure Filings Jump as Moratoriums End (cnbc.com)
Hawaii foreclosures soar 503% in March (honoluluadvertiser.com)
Biggest Real Estate Bankruptcy In History (bloomberg.com)
Deflation Has Gone Global (Mish)
The Real Fiscal Crisis Is Yet to Come (knowledge.wharton.upenn.edu)
Looting Social Security (thenation.com)
Wells Fargo Appraisers Lawsuit (hbsslaw.com)
Is fear the cause of the business feeze? I think not (examiner.com)
Unsafe Money Market Guarantees Expire in April (geldpress.com)
Goldman Sachs Tries to Shut Down Financial Blogger (marketoracle.co.uk)
No End Yet for Downturn in Housing, New Data Sugges (nytimes.com)
Why a 50% Drop in Housing Is Not the Bottom (Charles Hugh Smith)
T2 Partners Presentation (scribd.com)
Yahoo plans to eliminate up to 600 jobs (sfgate.com)
Unemployment Impacting S. California's Rental Markets (nuwireinvestor.com)
Commercial real estate market softens (sfgate.com)
On the front lines of the US meltdown (macleans.ca)
Empty Florida houses may return to nature (latimes.com)
Economist Predicts Future (dilbert.com)

I have been told for many years now from brokers that the commercial real estate is the safest and most secure type of investment I can do. Why? Cashflow. And when I disagreed with them that there is no such thing as fail safe investment, whether it'd be stocks, real estate, commodities, etc, they would either roll their eyes or look at me like they're talking to Dorothy from Wizard of Oz.

Fast forward to 2009 and apparently, we're not in Kansas anymore. In fact, the real estate foreclosure tornado is about to hit the commercial arena and with a full force.

In fact, much larger than expected. I hate to say this to those "investors" who paid for 5 cap properties in, well, crap neighborhoods, thinking that they're going to flip to another idiot. You know what they say: everyone has a dumb friend. If you need to look around to see who the dumb friend is, guess what. (I'll leave the punchline to your imagination)

Commercial real estate is safe in a sense that it is bought for business reasons (i.e. rent it out for cashflow). But it's riskier in a sense that there aren't (that I know of) fully-amortized loans. The loans are due anywhere between 1 to 10 years, depending on size, type, and terms of the loan. In another words, if you as an investor plan on amortizing the loan to $0 in time span of 30 years, you'll need at minimum 3 loans - 1 acquisition at time of purchase and 2 refinance (10 yr term loans) every 10 years.

What happens if you're positive cashflow but yet cannot refinance at your 10th or 20th year? If you refinance to an amount lower than what you owe and do not have the cash to make up for the difference, you're going to sell at a loss. Pretty simple concept. No rocket science here.

But what is happening in the market? First of all, there is the credit liquidity crisis, i.e. there are no loans. Second, even if there are loans, the maximum LTV on the loan has significantly decreased since the residential real estate foreclosures has begun:

With credit markets still shaky, about $171 billion in loans backed by offices, shopping centers, hotels and other commercial buildings are coming due this year.

....

But they've tightened their standards significantly from the easy-credit days. Lenders are requiring more equity – essentially a larger down payment – and charging higher interest rates on loans.

Where landlords may have been able to get a loan for 80 percent of a building's value during the boom, lenders now are limiting loan amounts to as little as 50 percent of value.

In another words, commercial real estate is going to see its ugly wave of foreclosures. In fact, the deflationary pressure on the commercial real estate market has started to take its toll:

Meanwhile, the value of commercial property has fallen in many cases as the economy has deteriorated. Across all types of property, values dropped 17 percent in 2008, said Rebekah Brown, a vice president in asset management for JPMorgan in New York. Forecasts call for values to fall 15 percent further before stabilizing.

When the economy tanks, businesses go, well, out of business. Less businesses there are, less tenants there are. Less tenants equals vacancy, which equals lower income and lower property value:

The demand for office space was negative in 2008, according to data from commercial real estate firm CB Richard Ellis. Although 7.3 million square feet of new office space became available last year, there was a negative absorption of 603,000 square feet.

In 2007, roughly 1.5 million of the 4.9 million of office space constructed that year was absorbed.

On top of that, construction continues on projects that will add another 3.1 million square feet of office space in the Valley.

In the industrial market, only about 630,000 square feet were absorbed of the more than 12.3 million square feet of space that was built in 2008 were absorbed. And 3.8 million square feet are still under construction.

And the industry "specialists" and "insiders" who have told us investors that commercial real estate market is a recession/trouble proof investment is now telling us otherwise:

“I expect it to get much worse in the next two years,” said Jim Rounds, an economist at Scottsdale-based Elliot D. Pollack Co.

With all this negative news, what's a small investor to do? Very simple. What naturally follows a problem? Of course, the opportunists:

Sales generated through auctions — including residential, commercial and agricultural properties — totaled $58.6 billion in 2008, up 38 percent from $42.3 billion in 2003, according to a recently released tally by the National Auctioneers Association, a trade group based in Overland Park, Kan.

In fact, wise real estate investors/developers are actually buying right now because the pain is so great. Donald Trump is no exception:

Donald Trump has sealed a deal to buy Lowes Island Club, a country club with two championship golf courses in Loudoun County.

The Washington Business Journal reported in January that Trump was in negotiations to acquire the club, and his organization has now confirmed that it bought the 800-acre site.

If I had a time machine, I would go back to 3-4 years ago when I was having a coffee with a broker named Milton who told me and my partner of an "amazing" 5 cap deal in Stockton, CA (highly agricultural, low-end market in central California). Instead of wasting an hour of my life listening to him pitch to me about these wonderful investment opportunities, I should have acted out lines from Wizard of Oz with my business partner:

Don't be silly, Toto. Scarecrows don't talk

... and it seems like the fat lady hasn't even entered the room, let alone get on the stage.

According to Bloomberg, the former investment banker John Talbot prints a realistic yet grim picture:

Talbott is an oracle with a track record: His previous books predicted the collapse of both the housing bubble and the tech-stock binge before it. A friend who runs a New York steak house introduces him as Johnny Nostradamus, he says.

What sets him apart from other doomsayers is his relentless emphasis on simple arithmetic. He walks you through the numbers to show how U.S. house prices got so out of kilter with wages, rental prices and replacement values -- the cost of buying a property and building a home. (“Homes in California by 2006 were selling at three to five times what it would cost to build a similar home from scratch,” he writes.)

Five More Years

Talbott’s latest predictions are sobering. The U.S. is only halfway through the total potential decline in housing prices, he says. Home values will continue to deteriorate for four to five years, he forecasts. Adjustable-rate mortgages issued in 2004 and 2005, for example, are only now resetting for the first time, he notes.

Is he a doom-gloom nay-sayer who's more interested in getting attention than a fact reporter? Perhaps. But what's more interesting is that he's not alone.

The Intuitive Blogger reports that with the next wave of sales from baby boomers who want to cash in on their homes and investments,  the deflationary pressure on real estate prices will increase:

And who will still feel the pain? Of course, California:

California’s prices will have to fall much further, particularly along the coast. Due largely to restrictive land use policies, California house prices had risen to well above the national Median Multiple by the early 1990s, an association identified by Dartmouth’s William Fischel. During the last trough, after the early 1990s bubble and before the 2000s bubble, the Median Multiple in the four coastal California markets fell to between 4.0 and 4.5. It would not be surprising for those levels to be seen again before there is price stability.

Using this standard, I expect median house prices could fall another $150,000 to $200,000 in the San Francisco and San Jose metropolitan areas. The Los Angeles area could see another $100,000 to $125,000 drop, while the San Diego area could be in store for a further decline of $50,000 to $75,000.

Ouch. What's even more fascinating is that, even in a upscale locale like Orange County where the median income is TWICE that of the national average, one million-dollar O.C. home faced foreclosure for every two sold.

Well, i guess the blood hasn't completely spilled over. Investors, keep your eyes open and your wallets ready.

More corporate bandit-ry: a $87,000 Rug

Merrill Lynch’s CEO spent over $1 million and hired the Obamas' decorator to redecorate his office last year—even as the firm faced a financial crisis.

Thain spent $1.22 million of company money to refurbish his office at Merrill Lynch headquarters in lower Manhattan. The biggest piece of the spending spree: $800,000 to hire famed celebrity designer Michael Smith, who is currently redesigning the White House for the Obama family for just $100,000.

Big ticket items included $87,000 for an area rug, four pairs of curtains for $28,000, a pair of guest chairs for $87,000 and fabric for a "Roman Shade" for $11,000.

What is this rug made of? Collateralized mortgage backed securities?

How to live for free if you're a victim of the bust: Urban RV Parks