Wilbur Ross: "The Beginning Of A Huge Crash In Commercial Real Estate"
In what would could pass for Cohen & Steers' worst nightmare, Wilbur Ross today said that he anticipates essentially an Armageddon for US commercial real estate. What we fail to see is how this is news... What we fail to see even more is how the hell REITs are still trading where they are? It must be all those non-cash dividends, the staggering debt loads and the exploding cap rates which make them such an attractive proposition. As Ross points out: "All of the components of real estate value are going in
the wrong direction simultaneously. Occupancy rates are
going down. Rent rates are going down and the capitalization
rate -- the return that investors are demanding to buy a
property -- are going up." Which begs the question: just because everyone knows the potential fall out associated with CRE, yet no proactive steps are taken to moderate these adverse developments, save a hope that the Fed will inflate debt sufficiently before 2012 when the refi crunch hits in earnest, does this make REITs a strong buy as BAC/ML has been claiming for months on end?
Some more perspective from Bloomberg:
Billionaire investor Wilbur L. Ross
Jr., said today the U.S. is in the beginning of a “huge crash
in commercial real estate.”
U.S. commercial property sales are forecast to fall to the
lowest in almost two decades as the industry endures its worst
slump since the savings and loan crisis of the early 1990s,
according to property research firm Real Capital Analytics Inc.
The Moody’s/REAL Commercial Property Price Indices already have
fallen almost 41 percent since October 2007, Moody’s Investors
Service said Oct. 19.
Ross, the 71-year-old chairman and chief executive officer
of WL Ross & Co. LLC, said in an interview on Bloomberg Radio
that he would use “extreme caution” before putting money into
commercial real estate, especially office space, because
properties are losing tenants.
“I think it’s going to take quite a while to work itself
out,” Ross said.
As of Oct. 15, Ross said he had spent less than $100
million of at least $1.5 billion available to him under the
Public-Private Investment Program, an investment pool of private
and government money for purchasing distressed assets from
Ross is not alone in his CRE gloom, and was joined most recently by billionaire George Soros:
Billionaire George Soros, speaking today at a lecture
organized by the Central European University in Budapest, said a
“bloodletting” may be coming for leveraged buyouts and
commercial real estate.
“The American consumer will no longer be able to serve as
the motor for the world economy,” said Soros, 79.
Yet every story has two sides. And while we have beat the dead horse which is the avalanche of endless Merrill upgrades, which have led to the lone bright light in the firm's investment banking/underwriting revenue, a different angle is provided by REIT manager Cohen and Steers which must be looking at today's action with just a bit of trepidation. We point you to their most recent investment commentary. We also suggest you swallow the blue pill before reading this.
REITs have rebounded significantly from their lows in March (although
they are still 50% below their February 2007 peak) largely because of
the aggressive steps they have taken to repair their balance sheets and
trim expenses. In this, they are substantially ahead of domestic
private operators, which have limited access to capital and will
require additional equity capital to recapitalize. In fact, we expect a
number of cash-strapped private companies to address their capital
needs by launching REIT IPOs—a development we welcome, as it will
expand our investable universe.
We believe that the next phase
of the recovery cycle—acquisitions—will likely begin next year and
extend through 2014. REITs will be in a position to take advantage of
buying opportunities, most likely from distressed private sellers.
Acquisitions will be followed by a recovery in economic fundamentals
characterized by an improvement in occupancies, rising rents and
resumption in REIT top-line growth. Our best estimate is that this will
begin to occur in the second half of 2010. [Ross and Soros on one side; Cohen and Steers on the other... not sure who we are going with on this one just yet]
In the meantime, as
real estate valuations seek out firm ground, we will maintain our focus
on well-capitalized REITs with healthy balance sheets, and pursue
select opportunities among companies we believe are undervalued, but
have sound business models and strong management teams.