Where is the RE Bottom: Zell says Commercial WIll be Fine
Submitted by
CalculatedRisk on Mon, 04/28/2008 - 8:52am (111 comments)
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Zell said the same thing about CRE being fine six months ago at a Grant's conference. since then, the CMBX has completely fallen out of bed so he was totally wrong.
He must be about to sell some CRE.
Yes Zell seems to be missing the CRE picture.
Best wishes
losses overstated?
...so I guess these financial institutions are suffering from a savings-glut, un-necessarily hoarding capital under the misbegotten notion that they need to increase their capital reserves to cover chimera losses...nonsense! ex nihilo!
Zell's a newspaperman now, so forgive him if he starts getting everything wrong.
Talking his book. Despicable.
Just a naive question: Could it be that a large part of the value of Zell's new investment is the CRE it occupies?
w writes:
Just a naive question: Could it be that a large part of the value of Zell's new investment is the CRE it occupies?
Not naive. Zell justified the Tribune price by indicating he intended to sell off some trophy properties.
W
I would call that an astute observation, not naïve. Although it looks like the plan to sell off Wrigley Field separately from the team hasnt worked so far. By the way, Mr. Zell knows you should never speak badly of the other players at the table from which you have just taken large sums of money.
Regards,
Eitiher he's an idiot, or he is trying desperately to save his own ass.
I'm guessing the latter, but it's looking a lot like the former.
Zell justified the Tribune price by indicating he intended to sell off some trophy properties.
Ya like Wrigley Field.
on a different note, people like myself must be wondering how the banks have been able to raise capital so easily lately. and its pretty simple. the implicit fed backing of inv bank mortgage bond holdings has now given the savy investors the confidence to buy merrill preferreds like they would a fnma or fhlmc bond. it all shares the same fed/us treasury backing. thats why these banks, lately, have had no problem raising capital in the mktplace. there is an interesting development as it sure makes treasuries look rich when similar-backed citigroup preferreds can be had for 7.50%. i want to know when the banks will start lending to each other.
Although it looks like the plan to sell off Wrigley Field separately from the team hasnt worked so far.
Isn't the city gonna buy it? Name it Mayor Daley Park or something (half joking).
yes zell has no idea what he's doing that's why he been so unsuccessful in real estate.
yes zell has no idea what he's doing that's why he been so unsuccessful in real estate.
Anonymous | 04.28.08 - 1:25 pm | #
Ya and he never talks his book and always informs the market exactly what he really thinks, never a behind the scene move or abrupt change in direction.
Full transparency - that's how you earn the name 'Grave Dancer' alright...
I had to do a double-take this morning. When I first saw this, I thought Buffet had bought the ballpark.
Dryfly
LOL...Since he is a Southsider...Daley claims he is a Sox fan...He was trying to sell it to the state...so maybe Blaggo Field. That has a certain ring.
Anon...I think Zell is dumb like a fox. He has managed to enrich himself pretty well so far.
Regards,
Can you provide the source for the Zell comment?
Thanks...
SIV- CR's at the conference listening to the man, REAL time.
LOL... can't believe the bears here are dissing Sam Zell--probably the best real estate investor in the last 30 years!
CR,
I asked his question in the post below and thought that maybe you had some thoughts:
Why has the vacancy rate been stable (fluctuating between 2.6% and 2.9%) for the past six quarters? Most of the increase occurred before 2006, and there is no discernible trend since. Yet 2007 was the year when the bulk of credit tightening and foreclosure growth occurred.
Zell was the guy who marked the top of the market when he sold Equity Office. So he can afford to be a little more sanguine now.
In the all real estate is local vein I was referring to Zell managing to sell the Tribune Studios in Hollywood for $130 million to Los Angeles-based Hudson Capital LLC.
IMO Zell is still S.O.L. Something like $8b leveraged debt. Read this WSJ: How Will Tribune Pay Its Debts? - WSJ.com
Siv V,
"We" aren't dissing what Zell has done in the past. We are rightly calling him for saying one thing and doing something else right here and now.
ot dissing, just discounting. Tommorrow the news will say that Zell says there is no problem in CRE and the hopeful will believe him. Then he can eat their lunch.
I think what dancer meant was: "Do not panic."
It makes sense, because when people panic (indicates an action was taken too late)they make their misfortune only worse.
Wow. They are really whistling as they pass the graveyards aren't they
CR,
Thanks for blogging the conference. Much better than having to be there (
.
Rob Dawg writes: IMO Zell is still S.O.L. Something like $8b leveraged debt.
Sounds like it might be the debtholders who will be S.O.L...
RD
That amount of debt in the "newspaper" business looks daunting.
Course, with the ESOP, Zell may be personally set off from that.
Like I said...dumb like a fox.
By the way, in interest of full disclosure...I am a Sox fan...so anything to do with the "Flubs" is tainted to me.
Zell Sees Start of Housing Recovery in the Spring - CNBC
Here is Sam Zell calling for a recovery in residential RE this spring. Bad economy news is propaganda from 'Evil' Democratic presidential nominees. I bet 9 out of 10 of his employees are Democrats.
Zell did well in the last bubble, b/c he started buying at the right time and he got an offer that was virtually impossible to pass up, so he sold. I don't think it was so much of him timing the top (but he did buy at the right time).
Maybe he made such a killing that he lost his "eye of the tiger" and has been spending too much time buying newspapers rather than studying the fundamentals of CRE. If he had been studying the fundamentals, I believe his answer would have been much different.
Good luck with that new company, Sammy. You'll need it.
Yeah, the ESOP was a master stroke. How are those ESOP airlines doing since their conversions? Pan Am for instance?
I only keep the LATimes subscription because we are wicked coupon clippers and the price is justified by the savings. I'd pay extra for a "no auto, no real estate ad" version. To see Zell's depth of bad judgement I suggest anyone grab a copy of the Sunday LATimes and pull out the auto and RE ad sections. Now prorate for the ancillary ads scattered throughout the rest of the few remaining pages. No, understand that what remains is tremendously expensive to produce. Now recall that the content cannot be outsourced for any savings. Zell bought Pan Am with Tribune.
"That amount of debt in the "newspaper" business looks daunting. "
The newspaper business is on the downhill slide, and the financial market is as big a reason as the Internet.
Many newspapers carry a 'way high valuation -- set back in the '70s when they controlled advertising in their markets and easily pulled in 17+ percent profit a year.
The only way to maintain high profits in the face of loss of monopoly is to spend less on editorial, water down the product, and hope people don't notice for a few years. Eventually, they do.
Sam is going to do what a lot of vultures do in media -- sell off anything that's saleable at a good price, make the rest look good through promotions and more cost-cutting, and take his profits before circulation falls too much more.
There is a difference in commercial and residential real estate - different fundamentals and valuation analysis. The CRE finance segment was no where near as aggressive (abusive) as the rezi sector was. I think CRE will weaken, with retail hit first, then office a little less, multifamily not so much. Cap rates will rise and finance is choked off, so the outlook is not great, but to lump rezi and CRE together is just wrong. The CMBX is not a good indicator of fundamental CRE values. There is no CMBS volume, and no demand for those bonds, thus the CMBX is out of whack.
w -
thanks for the link - I saw the interview and thought Zell is either an idiot or has a different agenda - it may be political or he may simply be still building his short position....
All, Zell isn't talking about new CRE construction, rather his comments were directed to CRE pricing.
David Pearson, I'll get back to the vacancy data tomorrow - unfortunately i was stuck on the 405 for some time.
Best to all.
BD
By the way, new circ. figures indicate that Zell's papers dropped anywhere from 4 to 5% in the last year.
Yahoo! 404 - Page Not Found
Regards,
RE Credit Guy, When cap rates fall about 400% in four years, I'd call that a problem/bubble. You may disagree, but, when leverage is rampant and, then, cap rates increase, significant problems will arise. I guess the question is how much will the fed rate cuts limit cap rates increases? I think it will help mildly, but not enough to prevent the carnage.
Buffet:
"This is not a field of specialty for me, but my general feeling is that the recession will be longer and deeper than most people think," Buffett said. "This will not be short and shallow.
Expired
In the retail businesses ... if anything, they've gotten a little worse," Buffett said. "Of course, things connected with housing, whether it's in brick or whether it's in carpet, those businesses have shown no uptick at all. Jewelry had a bad Christmas ... and it stayed that way."
Buffett sees no respite from the housing slump.
"I think this is going to be fairly long and fairly deep, but who knows," he said.
Buffet or Seb/O-joe???
Who do I believe???
Well, thanks goodness Buffett came right out and said he's not an expert. If he were, he'd be following the Wright Model B and the Sebastian Model A (revealed to us yesterday), and know that there is no recession.
OT:
Sell in May and go away,
Sell in June, it's the summer swoon,
Sell the lie in July.
Sell in August, you haven't the foggiest.
Sell in September on the advice of a family member.
Sell in October, is it almost over?
Sell in November, in anticipation of Decmeber.
Santa Clause Rally!!! (just like last year)
Sam Zell started by saying we need to separate commercial from residential. Commercial will be fine in his view (not my view).
This is why Zell sold all of his CRE, right?
With the exception of [primarily unanchored] retail, I agree with Sam Zell's relatively bullish comments on CRE.
It is fun being at a conference with a famous semi-secret identity blogger.
Elvis - I hate to do sound like one of the 1996-2000 .com bubble hypers who screamed how everything is different & fundamentals don't matter... but I think REITS & CMBS made everything different. They reduced the liquidity, diversity, capital size, and transparency problems CRE faced until the 1990's. I believe the current 5-8 cap rate range is long term sustainable and the 9-12 long term average is a thing of the past.
CR, who are these fools you spent all that time on the 405 just to listen to? Haven't they heard of the Wright Model B?
Ya and he never talks his book and always informs the market exactly what he really thinks, never a behind the scene move or abrupt change in direction.
Full transparency - that's how you earn the name 'Grave Dancer' alright...
That's right. Great investors and speculators make all their money by giving away their ideas to the masses in public venues.
Rob Dawg, don't waste your time. If SiV was even barely capable of reading comprehension, he wouldn't have invested his life savings in Ambac.
Gary, good point.
Here is Sam Zell calling for a recovery in residential RE this spring. Bad economy news is propaganda from 'Evil' Democratic presidential nominees. I bet 9 out of 10 of his employees are Democrats.
Here he clearly says "no recession in 2008". We'll test him on that one at the end of the year.
Gary, you are right but it got you thinking. I think of the Siv types as backboards useful for practice and refining my own technique. I'm not trying to teach the backboard anything.
You guys think you're so smart, but ABK is up 7.5% today. Conjure is probably making a killing on it.
"That's right. Great investors and speculators make all their money by giving away their ideas to the masses in public venues."
Sure, play your cards close to your vest, nothing wrong with that.
Saying the opposite of what you believe in public, if that's what he's doing -- that's something else. That's a con.
RE Credit Guy makes sense to me. 2099 Penn in DC sold for over $800/ft, foreign capital. Colony Sq in Atl will be another one to watch. We've had stupid underwriting in CRE, and some product on the market is non-core/reposition plays.
The pensions and insurance folks are just starting to be able to play in CRE, they've been waiting a while. They have dry powder.
As for the finance side of it, CMBS etc, a different story. There is not much demand for that. So if you need financing to purchase (Blackrock et al), you can't get stupid on pricing because the cap rate compression won't bale you out of sloppy underwriting.
Just my opinion, best to all of you!
Bob Dobbs said: "That's a con."
Heh, heh - and your point is?
Zell's really no different than the rest in that regard.
I believe the current 5-8 cap rate range is long term sustainable and the 9-12 long term average is a thing of the past.
RealEstateRisk
I think Zell sold between a 1% and 2% cap rate. That is a bubble. Not sure where the cap rates will stick, but even if they go back and stay at 5-8% like you say, it will still an enormous shock to the system. A 1% cap on $1,000,000 net cash flow is $100,000,000. A 3% cap rate is $33,333,333. A 5% cap rate is $20,000,000. That is a loss of $80,000,000 going from 1% to 5%. No problem, though. CRE is safe.
cap rates only matter if you have to trade or refi
Here is Sam Zell calling for a recovery in residential RE this spring. Bad economy news is propaganda from 'Evil' Democratic presidential nominees. I bet 9 out of 10 of his employees are Democrats.
I watched the whole thing, and I can't help feeling Zell doesn't necessarily say exactly what he means.
At one point it seems like he's trying to boil the whole economy down to politics. Like America hating liberals invented business cycles or economic realities.
I can't really take any mix of economic, investment and political themes very seriously.
"cap rates only matter if you have to trade or refi"
dc1000
OK. Just like comps or stock price only matter if you have to sell.
"can't believe the bears here are dissing Sam Zell"
It's always best to watch what people do rather than listen to what they say. It's called misdirection, and it's intended for the dupes.
MLM writes:
You guys think you're so smart, but ABK is up 7.5% today. Conjure is probably making a killing on it.
And Sebastian's NEW/NCEN/NEWC/NEWCQ is up 21%. Killings all across the board today.
"This will not be short and shallow"
And buffett may be talking his book too. He likes assets to get clobbered, since he's a bottom fisher. He must hate the PPT driving assets to the moon.
Lets talk numbers.
Cap rate history for the last 15 years in CRE. I think cap rates (espeically for retail space) are still near all time higher.
Commercial RE lending terms. From 2004 to 2006 many formerly levelheaded CRE investors succumbed to the flipper mentality. This was fostered by insanely high LTV terms offered. Aren't CRE LTV levels usually in the 60-75% range? Look at Macklowe in NYC...he was over 100% LTV on a cash flow negative portfolio of properties. That is not RE investment...that is flipping.
With CRE cap rates at all time highs, and CRE lending tightening up, someone explain to me how CRE can not come way way down in price. Rents sure as hell are not going to rise entering a recession.
Zell is in denial. The funamentals have digressed too far. Any return to funamental ratios implies a large drop in prices.
Am I wrong about any of this?
"can't believe the bears here are dissing Sam Zell"
It's always best to watch what people do rather than listen to what they say. It's called misdirection, and it's intended for the dupes.
He keeps making the same argument that was made repeatedly in past couple years to say that the US economy isn't headed for trouble (clearly it is in trouble now) - corporations are fine, their balance sheets are in great shape, they've got lots of cash.
Hey peoples, this is a consumer driven economy, wake up!!!
Corporatations could be just fine and 72% of the economy could still go to hell smarty pants.
So what? ABK (the company and the stock) has become a casino.
You can make 100% on your money on one spin of the roulette wheel, too.
Welcome to the triple-A casino.
Do you know how much of America's financial security (in banks, life insurance, annuities, pensions, endowments, etc.) is tied to triple-A and double-A securities?
I can assure you that a lot of people who wanted safety aren't happy to find themselves in a casino.
Warren Buffett, the world's richest person, said Monday that the U.S. economy is in a recession that will be more severe than most people expect.
Buffett: Economy in a recession, will be worse than feared - USATODAY.com
DOH...I of course meant cap rates still near all time LOWS.
And buffett may be talking his book too. He likes assets to get clobbered, since he's a bottom fisher. He must hate the PPT driving assets to the moon.
I'm pretty excited. It might be possible to short the HBs again if their stocks go up a bit more.
BrantW,
When you say "way way down", why don't you talk numbers?
With Zell's mention of class-A buildings, seems to me he's talking the office space sector of CRE, which will perform better in a downturn. Probably doesn't apply to retail, multifamily as much. Just a guess.
Elvis,
How is a 5%-6% cap rate sustainable with loan rates that are higher than that?
Cap rates have been held down by rising rents. In retail especially, rising rents may be a thing of the past. This changes the whole long tern dynamic. I think that not only are cap rates going back to the traditional 9-12%...I think they are going higher.
As for dissing Zell...Macklowe was a great RE investor too. He does not look so smart now...
rich - I was speaking more than a little tongue in cheek. I think it's fair to say that a lot more stocks than just ABK are casino stocks.
Anonymous,
You are of course. Prime A+ office space is always going to be the first to rent....just like the hottest girl who never has to worry about not having a date.
But then again, it does not get much more A+ than the stuff Macklowe tried to leverage....
As for numbers, cap rates must rise. Rents even for prime A+ will go flat at best. Thus, if you project a return to traditional cap rates, you could be looking at 30% price drops.
Watch Buffett...confectionery always does well in a recession...right?
Here is Sam Zell calling for a recovery in residential RE this spring. Bad economy news is propaganda from 'Evil' Democratic presidential nominees. I bet 9 out of 10 of his employees are Democrats.
Who you going to believe? Sam Zell or your lying paycheck?
BrantW,
I think cap rates will go back to historical averages, too. I was just using the lower RealEstateRisk post numbers to exemplify how big the hit will be even if cap rates stayed relatively low. Investment CRE is screwed.
view on europe - ever...??? conditions are extra sick over here, spain, uk, finland... makes the us look pretty healthy...
I hope you will report mostly on any data that is presented, and not just participants' opinions and glib predictions, which are nearly worthless, IMO.
BrantW - same anon here -
first, Elvis was quoting RealEstateRisk.
Second, LTV is limited to 70% or so, mutatis mutandis - I don't know how that relates to cap rates. Plus throw in I/O, etc and it's hard to compare a yield to an income rate.
Third with the dollar doing what it is doing, core US properties look like a bargain. Remember the scare that the Japanese were going to buy up America? I think that story will come back, insert middle eastern slurs. Rents may be flat (or even slightly negative in the Golden Triangle as CBRE's Torto has it), but the key is demand, which isn't always well guaged by debt market behavior.
""Obviously what we have going on is an attempt to create a self-fulfilling prophecy,"
Yep, Karl Rove has said the same exact thing. People are defaulting on their mortgages not because they don't have enough money but because the evil liberals have convinced them otherwise. Millions of Americans aren't having a hard time paying their bills on top of their mortgages because of rapidly rising medical, heating, gas, food, or higher education costs, or reductions in working hours. Nope, it's those damn evil liberal Democrats creating an illusion of those things. In reality, all Americans are flush with cash, working 40-hour weeks with fully funded pensions, complete medical care, and cheap college tuition for their kids.
"You are of course. Prime A+ office space is always going to be the first to rent....just like the hottest girl who never has to worry about not having a date."
No absolutes. They're just finishing a five-story Prime A+ office development in my seaside resort/college town at rents 30-40 percent higher than the current top. And there's no shortage of decent office space in town, nor any new business moving in. Not a square inch of the place is pre-leased.
There's the common wisdom, but stupid is stupid.
Maybe "CRE" means different things - Office != multifamily/retail/industrial etc.
Is the US government just going to pack up shop and stop renting in DC? Whether a democrat (social services/ healthcare) or republican (defense) takes over, DC's main tenant is still going to pay the rent, and probably will increase. Foreign buyers know that.
And midtown Manhattan, don't get me started.
$800/ft??? Are you selling a large dick to Spitzer's hottie?
The unit of (un)real estate is sq. ft.
Bob Dobbs, I agree wholeheartedly. Rents generally go down across the board in a severe recession, especially when there is an oversupply of space. New construction is SOL, b/c of the high, recent cost of construction.
Buying any office buildings, especially Class A, is extremely risky in an environment of historically low interest rates. Remember, fools have money, too.
err..."historically low caps rates"
CRE is in for some rocky times, I agree. But debt is still available through insurance companies/pension funds/financial co's balance sheet programs. Terms (LTV/DSC/IO/Pricing)are not near as favorable, but debt is available. Cap rates are going up, period. How high is tough to tell, it will be driven by the 10 year treasury/inflation. Buyers and sellers will adjust to new market dynamics (weak economy, higher interest rates/cap rates, worse debt terms) and transactions will continue because liquidity is still out there for quality CRE deals. The class A/B CRE market will adjust, not crash. At heightened risk of crash are Mom and Pop that own the retail shop down the street...
But debt is still available through insurance companies/pension funds/financial co's balance sheet programs.
This would be a great time for rich to chime in on how he thinks these entities' balance sheets are going to look in a year or so.
We all know Wrigley Field has problems...the Tribune building is even worse. We aren't talking about the RR Donnelley building or 2 Prudential here.
The Cubs without "the" Wrigley Field won't be the Cubs anymore. We all make bad trades...this could end up being a big one for Zell.
Some anecdotes from my neck of the woods. Our building has lost a couple of tenants over the last year and the only space that I know has rented was a sublease (fully furnished) that went for around $1.00 per sq./ft. less than the going rate. That and I've been staring at 3-4 floors of unoccupied space across the street in a recently rehabbed building for over a year.
Is the US government just going to pack up shop and stop renting in DC? Whether a democrat (social services/ healthcare) or republican (defense) takes over, DC's main tenant is still going to pay the rent, and probably will increase. Foreign buyers know that.
And midtown Manhattan, don't get me started.
Netochka Nezvanova
With any of the candidates gets in, there's gonna be a lot of downsizing on K street in January.
The Cubs without "the" Wrigley Field won't be the Cubs anymore. We all make bad trades...this could end up being a big one for Zell.
Enfinity | 04.28.08 - 3:59 pm | #
Maybe Zell should have them play at Meigs Field instead... close to Tribune Bldg. & the wind blows out there just the same. Plus Mayor Daley has made that asset available too!
I don't see vacancies being filled either and rents are soft.
Still, I'm thinking cap rates will settle in the 7-8% range for the most part and not go higher than that except in really depressed areas.
What I can't believe is that anyone was lending or borrowing more than 70% LTV on CRE. That's not investing IMO, but more like the casino mentioned above.
Re: Meigs Field
What a fraud that whole program is. Planes circling the field as Daley bulldozes "X" marks into the runway.
If no one was sure about American Fascism...look no further than the Meigs Field late night bulldozing.
C'mon Alec, when has that ever happened? When has government ever voluntarily shrunk? Perhaps one could make the argument should McCain win - but as I said I think that implies defense contractors and Northern VA wins big; But should Obama or Clinton, do you really think they will have a mission to shrink government?
You think McCain, odf all people, would possibly shrink government? Keep dreaming.
Endless war with McSame in charge, with all the military spending it entails.
"Our building has lost a couple of tenants over the last year and the only space that I know has rented was a sublease (fully furnished) that went for around $1.00 per sq./ft. less than the going rate."
Down in Santa Cruz, I'm working in a pretty decent building on the outskirts that was built for a defunct dotcom (PumaTech). It's now full of remote UC offices and the California Certified Organic Farmers, so I think it's a safe be that the prices have come down.
That said, we're getting a new tenant, a unit of Altera the chip equipment manufacturer, who used to be downtown in a prestige building. So here's a case where a major corporate tenant moving and downgrading to save some bucks. We may see more of this.
Speaking of the "insurance companies" will underwrite the loans idea:
April 28 (Bloomberg) -- Hartford Financial Services Group Inc., the Connecticut-based insurer, said first-quarter profit dropped 83 percent on investment losses. The company cut its full-year earnings forecast.
Net income declined to $145 million, or 46 cents a share, from $876 million, or $2.71, Hartford said today in a statement. Net losses on its holdings were $648 million after tax.
Hartford's Profit Plunges 83% on Investment Losses (Update3) - Bloomberg.com
All this talk about Sam Zell reminds me that not so long ago I had dinner with a 91 year old lawyer who had worked with Sam's father. He said that as a courtesy to Sam's father, he had given Sam his first job out of law school...related that Sam's father said Sam couldn't get a job because he was "peculiar".
The lawyer said that he had to let Sam go after a short time because he was drawing a salary, but not producing billable hours. Sam spent his time putting together real estate deals and promoting them to other lawyers in the firm.
On the other side of my spouse sat a lawyer who had been a class-mate of Sam's at Michigan law school. That lawyer said it was amazing that Sam graduated at all because he didn't study, but spent his time working real estate deals with and on behalf of his fellow students.
FWIW:
1) most of the people agreed Bob Lurie was the brains behind the partnership [note Bob has been dead about 12 or 15 years and Sam seems to have done OK without him]
2) most of the people thought the price of the Tribune was too high, but that Sam's skin in the game was miniscule compared to that of the ESOP (and other backers?).
Re Zell:
Remember he sold his CRE (Equity Office, etc) several months ago to the "smart" PE guys and others. He timed his sale pretty good.
He probably does not want to rub it in or maybe there are some performance payments yet to be made. With Zell watch what he does not what he says!
Sam Zell started by saying we need to separate commercial from residential. Commercial will be fine in his view....
What is he talking about?
The following quote from "The Real Deal" updated 4/25/2008:
While the first quarter of 2008 showed a clear drop off in building sales from the prior year, a quarterly report from Cushman & Wakefield shows that some sectors of the market fared better than others.
The report shows an extreme drop-off of 95.2 percent in the dollar value of Class A office building sales to $582 million in the first quarter of 2008, from $12.1 billion the previous year. This compares to a comparatively mild drop of 62 percent for sales of all other offices, to $524 million in the first quarter of 2008, from $1.4 billion in the first quarter of 2007. The volume of multifamily buildings traded fell around 59 percent to $289 million in the first quarter, from $702 million in the first quarter of 2007.
Across all categories, building sales fell 89 percent to $1.7 billion so far in 2008, from $15.5 billion in the first quarter of 2007.
Bob Dobbs & barely - Zell still has significant CRE. His say/do are not in complete disconnect.
Elvis - Zell sold at a 5.1 weighted avg cap rate. The lowest sales that have ever taken place are a proforma 3.5 cap. Nothing has ever sold at 1% cap.
BrantW - I agree that cap rates hit all time lows in 2007 (and are up 25 to 50bps this year). CMBS is originating loans around 65% LTV, and even the worst stuff (spring 2007) was never above 75% LTV. Mezz & secondary debt has put many deals to 100% LTV, but primarily on class-A monster properties (I challenge you to find any piece of CRE in the entire country worth less than $20 million that is above 95% LTV it is also rarer then you make it sound to find a buyer with no skin in her property).
Also BrantW - A 5% cap rate on a 7% building is sustainable if inflation stays around 3%. I would argue the Fed is going to let inflation stay above 3% for a while to continue to bail out housing, which puts actual un-leveraged return on that 5% cap office building closer to 9 or 10%.
Everyone - look at it this way: Now that CRE is as easy to buy as S&P 500 (via REITS), why should CRE provide a higher rate of return? A 6% cap rate with 3% inflation yields a 9% total return (or ~10% with leverage). Unless you believe the S&P 500 will be yielding significantly above 10% going forward, I dont see why you think CRE should be.
RER,
Please refer me to where you got the 5.1 weighted average cap rate for EOP. I have always read it was somewhere between 1 and 2%. I might have bad facts, so I need to confirm what you say.
At least here in San Diego and in the other cities that I am familier with, the main renters of class A office space are lawyers, finance/bankers, and real estate companies, in that order.
Layoffs of bankers and RE companies have been well covered, but big law firms, which were once thought to be recession proof, are now laying off associates and even more so temp lawyers.
Here is some coverage on a legal blog targeted at younger big firm lawyers:
Above the Law - A Legal Tabloid - News, Gossip, and Colorful
Commentary on Law Firms and the Legal Profession - Layoffs
As for retail, don't forget assumptions about rising rents can't hold up for more than 10 years or so because CRE has a much shorter shelf life than residential.
While some retail space may enjoy a long life because its location gets more and more desirable, in general what happens is that after 20 or 30 years malls and strip malls lose their high-end tenants and become a depressing mix of vacancies, check cashing outlets, nail salons, etc.
From Barron's:
"The cap rate on Blackstone's initial purchase is estimated at 5.1% by Green Street Advisors, while the private-equity giant's sales of the EOP properties went at an average cap rate around 4%. The first-year yields are comparable to those on government bonds, but on much riskier assets."
I'm not sure where the 5.1 cap rate RER quotes comes from, but I remember at the of sale it was estimated at a 4.25% cap based on historical income... but many of the assets had low $ leases about to expire. The "true" (but overly conservative/low) cap was 4.25 though.
Blackstone Makes Quick Cash From Acquisition of REIT - WSJ.com
The only 4.25 in that WSJ article is UBS's estimate of the NY buildings only. No one else has cited any reference to a full EOP portfolio cap rate other than 5.1%.
That's good to know. Why did I have such bad info? Anyway, the difference between a 4% cap rate and an 8% is significant.
Sam Zell looks set to do an even more radical redesign of the Tribune and the LA Times than Rupert Murdock's doing of the WSJ. Here are some thoughts:
1) All RE ads, All the time
2) Comments (with blog insert)
3) Realtors galore to help with new 'Streetwise' distribution model
4) Sudoku, in 1D
5) Fridays: Page Three Girl Dress Down Day
6) Daily Interleague coverage
7) Zell Qaeda!
Jez, Perhaps lost in the emotion is this is a partial posting and perhaps Sam Zell said some other things as well, like why:
1) Credit market seizure a few months ago means CRE construction dies in 2009 and will be difficult to restart for perhaps 2 years.
2) Pending inflation is going to make building new Class A Office buildings far more expensive, helping sustain price of existing Class A buildings. NOTE: He didn't mention many municipalities doubling bldg fees to make up projected lost revenues.
3) There's a bid difference in demand for Class A Office buildings and suburban strip malls.
Nothing I heard him say this morning suggested CRE bargains were out there. Simply, Class A CRE wasn't going to get clobbered like the residential market--which he was extremely pessimistic about.
I agree with CR..but it's difficult being a contrarian and seeing dollars melt away as the market heads up...but I'm holding,holding,holding to all those shorts.