recent reports suggest that the "smart money" is moving in to scoop
up the bargains in CRE:
"'Bottom-Feeding' Investors Drawn to US Real Estate in Hope
Rates Stay Low" (Financial
beleaguered US commercial real estate sector has been attracting a new wave
of money from sources including foreign banks, US private equity firms, and a
leading Chinese sovereign wealth fund.
participants warn that the activity represents "bottom-feeding" by
opportunistic investors whose strategies could be derailed by rising interest
rates. Also, the deals done so far are tiny compared with the debts that need
the growing interest from investors is a sign of stabilisation, making it
less likely that worsening commercial real estate conditions will sink banks
and choke off a US recovery.
believe the real story is that capital is ready to buy, even though it may
not be so visible today," said Bob Steers, co-chairman of Cohen &
Steers, a real estate investment firm.
Commercial Real Estate a 'Train Wreck'" (MarketWatch)
Morgan Chase Chief Executive Jamie Dimon said commercial real estate is a
"train wreck" during a speech Monday, but noted that many of the
problems in the sector have already happened and won't affect the economy too
real estate is a train wreck, but it's already happened," Dimon said
during a speech at a J.P. Morgan /quotes/comstock/13*!jpm/quotes/nls/jpm (JPM
43.61, +0.12, +0.28%) health-care conference in San Francisco.
roughly $3.5 trillion in commercial real estate loans outstanding, a sizable
portion of that debt needs to be refinanced each year. However, the problem
is that the value of the properties backing those loans has fallen, he said.
specializing in distressed debt and foreign buyers have been attracted by the
lower prices, which has helped refinancing activity. Deals often take the
form of a recapitalization, in which the lenders become the equity holders,
"2010 REI Outlook: Real Estate Investors Planning on Buying
Commercial Properties Like It's 2005" (National
a quiet year of investment sales, buyers are preparing to forge ahead with
acquisitions in 2010. Two-thirds of investors (65 percent) who responded to
the 6th Annual Investment Survey plan to boost their investment in commercial
real estate over the next 12 months. That figure is up from 56 percent in the
third quarter and 51 percent a year ago. The exclusive survey is produced
jointly by National Real Estate Investor and Marcus & Millichap. The fact
that buyers are once again returning to the table is a huge vote of
confidence for a commercial real estate industry that has been slammed in the
past year by falling property values, occupancies and rents. Respondents to
the annual survey who do plan to expand existing portfolios anticipate an
average increase of 26 percent, up from 24 percent in the third quarter and
22 percent a year earlier.
me a cynic, but the following article, "Blindsided By Hope: Investors Need to Watch Poor
Fundamentals," at GlobeSt.com, a site which
provides in-depth and breaking commercial real estate news around the clock
-- and which might naturally be inclined to put a positive spin on
developments in the sector -- seems to be telling a different
story (italics mine):
energy, bolstered by marginal earnings growth, has outpaced the recovery of
fundamentals. As investors look to take advantage of
opportunities in the market, they may be ignoring the grim reality of weak asset indicators
and a still-dysfunctional financial system, said panelists at
Deloitte & Touche LLP’s Distressed Assets & Debt Symposium.
surprised that the market has jumped on what could possibly be short-term
earnings," said Deborah Bailey, director of governance, regulatory and
risk strategies at Deloitte.
"There were clearly things that were broken and they haven’t been
fixed yet." Regulators are still devising rules to
prevent further systemic failure, but that process has been sluggish.
New, senior managing director and co-head of distressed investing for GSO
Capital Partners and the Blackstone Group, suggested that the stimulus-driven recovery is
masking the risks still present in the market.
Bailey said she shudders to think what would have happened without government
sponsored actions. Stopgap measures, such as TARP and TALF, certainly halted
further hemorrhaging of the market, said Bailey. The capital purchase
program, for instance, provided floundering banks a lifeline during the
desperate days of the crash.
the purchase of
legacy assets through PPIP, she noted, has been far less successful and
cumbersome as investors slowly wind through the bureaucratic process. The
difficulty of determining pricing has largely hamstrung efforts to siphon off
the FDIC is managing to clear its stock of repossessed holdings through
foreclosure auctions, which are anticipated to ramp up in the coming year. In
some respects, the agency, the prime market clearing mechanism, has become an
RTC-like institution for smaller banks, observed David Ying, senior managing
director of corporate advisory business and co-head of the restructuring
practice at Evercore Partners.
the larger institutions, the
motivation to sell just isn’t there.
Precipitous value declines--down some 40% from 2007 peak levels--would
translate into substantial discounts and losses on assets brought to market.
However, sales activity in the past six months eclipsed the transaction
volume of the prior 18 months. If this trend continues, the market will
likely see an influx of deals.
some market observers remain leery of the continued poor performance of
commercial real estate. Occupancy and rental rate growth is all but
nonexistent across all property types. Randy Reiff,
founder of Spartan Real Estate Capital LLC pointed out that relative value has improved and
people are feeding into that excitement without necessarily acknowledging the
poor performance of asset classes.
question with commercial real estate is: 'Are people continuing to watch
fundamentals or are they being blinded by the technical effect," Reiff
market traded off 30 to 40 points a year ago and everyone was saying the
market rallied back. But fundamentals never came back."
Michael J. Panzner is a
25-year veteran of the global stock, bond, and currency markets and the
author of Financial Armageddon: Protecting Your Future from Four Impending
Catastrophes, published by Kaplan Publishing.