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An Objective Look At Commercial Real Estate: The Korpacz Real Estate Investor Survey
CRE is possibly the single biggest experiment in "extend and pretend" currently evolving (aside from the US economy itself, which like a drug addict, is fed its daily methadone of fiat money by its enablers Bernanke and Geithner) in America. This is confirmed by the latest Korpacz Real Estate Q3 Investor Survey: far from pig lipsticking in tried and true CNBC fashion, the report tells it how it is. The biggest victim of the ultimate CRE unwind will be all those REITs which for whatever reason are trading at almost bubble levels (SPG at $74 makes about as much sense as AMZN at $130). Dear REITs: 2012 is approaching rapidly and you still have half a trillion in equity you need to raise. Simon Property, as much as it wishes to emulate Goldman's success in the real estate arena, can not bankrupt then acquire all REIT firesale prices. Of course, when the tide of sentiment on REITs turns, it will be short and sweet: straight to zero, do not pass go, do not collect TARP, due to the value burned by these companies by not being in bankruptcy already.
From the report:
So far the deleveraging of the commercial real estate industry has disappointed many equity investors who have been waiting patiently to acquire decent, stable assets at distressed pricing. The current situation, however, could soon change. Due to the huge amount of leverage used to fuel the buying frenzy during the peak of the cycle between 2006 and 2007, many investors sense that it is only a matter of time before the for-sale market is flooded with properties by owners who are unable to cover their debt service obligations and incapable of refinancing. "Over the next year, more and more property owners will be in a position where they can't make their payments and can't supply additional equity to the lender in order to refinance," explains a participant.
While some investors are looking to the looming $153.0 billion of CMBS (commercial mortgage-backed securities) loans coming due in 2012 as the catalyst to jump-start buying opportunities, other investors are expecting near-term defaults with commercial banks to provide some distressed buying prospects. According to the Mortgage Bankers Association, CMBS and other securitized loans account for 21.0% of the outstanding commercial real estate debt while commercial banks account for about 45.0% of the debt total. "Many traditional lenders are not recognizing the huge problem in front of them and seem to have no urgency in finding a solution," remarks an investor. [hip hip hurray for Uncle Ben's doctrine of moral hazard]
Certain investors believe that many banks are playing a "timing game" – attempting to replenish their capital reserves while the economy and industry both strive to recover and bolster property values. If successful, the distressed sales activity that many eager buyers were anticipating would be limited. "It's a terrible time for anyone, including banks, to have to sell an asset," attests an investor. If property values continue to erode in the commercial real estate industry, many investors are hopeful that banks will be unable to continue to "pretend and extend" the troubled loans on their balance sheets and will need to declare their losses and place assets up for sale.
If such buying opportunities do materialize in the industry, the next challenge for investors will be asset pricing. "A bid-ask pricing gap still exists across all property sectors and in nearly every geographic area," notes a participant. Although some participants indicate that this gap is closing a bit, conservative cash flow models and a tremendous amount of uncertainty tied to the economy, the industry, and the unraveling of the debt markets are keeping offers quite low.
And for all those who think that the current 6% implied cap rate (based on stock prices) is even remotely credible, we recommend you take a look at the table below. Compare the 6.5% Manhattan cap rate with the 8% average for the rest of the nation. If anyone thinks New York is immune to the CRE collapse, we suggest you take a quick walk around Madison between 60th and 75th.
Full Korpacz report below:
h/t Brent
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Released on 11/19/2009 5:50:00 PM For wk 11/18 Reserve Bank credit Weekly Change $75.7 BNice work, Tyler.
I've been feeling like I'm in bizarro world holding SRS and watching the REITs (SPG in particular) drain my account for the past 5 months.
Dude, you and me both although my holdings are of a more recent vintage.....
Fuck it, lets go bowl.
Waldo
Ouch...5 months?
I hear you dude.
Believe me.
How's -26.69% sound,
Ouch.
Jeff,
As I hope you know, double inverse funds are for directional trading with stops. If you can't afford to get your B/E to under $10, you should not be in that trade. Do the math. I'm guessing you're in it at about $18-$20. With today's close at $8.84, getting back to $10 will take a decent sell off. And it closed a nickel off the highs which means the other top ten REITS in the SRS (love that Vornado, dontcha?) never let up except SPG coming slightly off the lows. I watch the SRS like a hawk--the shorts love to play in the double inverses. See this link:
http://www.shortsqueeze.com/?symbol=SRS
After you look at that link, check out the SKF in terms of short vs float. Amazingly lower. The game players are having more fun in the SRS. Best of luck to you. I hope you make it out with a profit.
Time to take it up a notch. Ditch SRS and go with DRV before it's too late!! The train will be pulling out of the station soon!
I took my worst ass-fucking ever on Capital Trust. (CT)
Recovered most of my long portfolio and sold most of it off.... have given up being long.
"Only" lost $888 on Realty Income (O)
Made a pile on SKF then bailed (not enough to offset my CT losses though)
Own some SRS but usually just "play daily" and sweat weekends, overnights.
Had our 401K switch me Bonds/Equities last year.
Have lost all faith in the US market.
People need to be very careful to parse which REIT is which. The vulture funds created this year may make some money, but any REIT that's been around long enough to have bought at the peak are screwed. Frankly, I'd even prefer a vulture REIT started next year to one started in 2009.
8% cap rates will be a sweet memory by next year. And I don't believe for a second that Manhattan is seeing 6.5% cap rates right now.
Not sure. Leasing and sales activity appears to have picked up significantly in Manhattan over the 4-8 weeks. Cap rates depend on too many variables, but with safe rates at zero, 6% still makes sense on certain properties. Depends of the safety/durability of the income stream. Some properties it makes sense; others you wouldn't touch at a 9% cap. I personally know of a sale of a large mixed-use midtown apt bldg that went to contract sub 5%. Just fwiw.
why wouldn't cap rate sbe 6.5% in Hogtown?
Where do you think all our taxdollas went to die?
By itself, CRE is a catastrophy. Layered on top of RMBS, it is a meltdown.
Buckle up for a wild ride in 2010.
There was a conference in NY yesterday, I think sponsored by NYU. 1000+ people. Many big hitters. Speakers including Sam Zell, Steve Roth, etc.
Everyone sitting on the sidelines.
No one buying properties.
Everyone looking to buy loans.
Zell saying big problem for next 5 years - 2014.
$4 Trillion problem.
No transparency at banks. They are hiding huge debt bomb problems.
Etc. Etc.
Send your banker a Christmas card because it is the last good news they will see for months and months...
You know how long it's been since I've seen a rational thought on SPG?
It was on this site, and probably back to the blogspot days. Thank you for that.
Those cap rates look low, wait till the vacancy rates uptick some more - a lot more in fact, then watch the cap rate move.
What industry sector has money to spend and needs CRE? Banks? Hotels? Retail? States? Lawyers? Realtors? Manufacturing Firms?
Maybe Apple, Repo men, and Fed Agencies are our the buyers/renters of last resort.
Not that we need anymore condos, but they be better off converting empty strip mall retail spaces to residential, they kinda look like lofts, have big windows and high ceilings...and when we gutted our manufacturing industry, at least we had the sense to convert those places to cool digs. And at least Bernanke is creating straw man buyers for residential market.
Not only are these assets going down cause people have to liquidate, won't be able to re-finance, they will also be losing more renters/buyers by the day.
Tyler, the correct spelling is "cannot" not "can not". You always write "can not" and it's irritating.
Vornado is another disaster waiting to happen. They own 33% of Toy's RUS which im not sure if anyone pointed out to them Amazon from here on out will be the dominant seller of toys for decades to come.
Vornado will have to cut their dividend in my opinion. Last year they were paying their divis and partial dilutive stock offerings. Furthermore Sears is a disaster waiting to occur as is their Kmart retail locations. One of Vornados largest retail customers is Kmart on Astor place which is like a cemetary. Judging by their inability to rent to large Broadway storefronts going on 2 years now I can imagine how long that Kmart space will stay vacant when they go under.
warning--the lesson i learned shorting VNO in the past is that its a big company and you cant just zero in on a little piece of it thats in trouble and call it a short thesis. unless you have a well-developed view on the manhattan office towers you are better off drilling down into a simpler REIT.
does anyone have fourth quarter korpacz 2009 send to mazzellaltd@hotmail.com, I have other issues it they are needed for past reference.