Roubini Gets It If Only Everyone Else Did

A. Joseph Marshall 

Coldwell Banker Commercial

Commercial Real Estate Advisor 

Savannah, Ga 

912-790-6999

Why Low Interest Rates Matter to CRE

Last Friday night I went out for drinks with an investment banker, a financial advisor, an accountant and the owner of a remodeling business.

As the evening relaxed (e.g. Booze!), I mentioned I was going to New York in May and June for meetings regarding distressed assets to drum up some business. The banker asked me, and I'll paraphrase, "Don't you think you'll be wasting your time speaking to those people? Don't you think the worst is behind us and bank owned properties are dwindling?"

And I said, "No, I think that this [2009-present] is just Round One."

And the banker said, "I agree!"

Why did we agree? Well, the systemic causes that lead to the recession are still in place: consumer debt, over-leveraged banks and business, and corruption on Wall Street. And now we're betting that sovereign leverage is the way to go. We have been told that pre-crash normalcy is returning because housing prices are increasing, the stock market is reaching new heights, CRE is back, gold prices are down, etc... And we are told that all this is inherent, indigenous... like creativity without a source.

But there is a source: low interest rates. An interest rate is how much you pay to borrow money. Banks don't make money with annualized interest rates of 3.25% or whatever it is today. But we have low interest rates to encourage people to borrow money to buy things. As an example, Americans are buying cars left and right and European manufacturers are depending on us. Did you know that about 80% of vehicle purchases are financed right now?

When you read in the paper that a million dollar property sold to whoever, chances are they did not pay cash, but borrowed most of the money for the acquisition. The low interest rates for CRE debt means more people will risk an investment.

But what happens when interest rates increase? Suddenly that debt costs more even though you may have "locked it in" and less goes to the principal. People may take less risks and buy less property. Small rate increases aren't a problem. Big rate hikes are.

This article explains that "low interest rates are one of the only things supporting commercial real estate prices." The author concludes that

"Cap rates are close to their historic lows for most property classes. At the same time, other commercial real estate fundamentals are still weak. This apparent disconnect- low cap rates and weak fundamentals- has prompted some observers to question the Federal Reserve's low interest rate policy. The concern is that low rates may be boosting commercial real estate prices excessively." 

But on the surface things look great! So let's focus on arguments that the market is nuanced, complex, dynamic, etc...

The banker and I are hedging by betting that our future income will come from the sale of more distressed properties coming to market as the rates increase. And we're both hoping people will have the means to buy. Got an income producing property in sight? Is it a good calculated risk? Jump on it now!

A. Joseph Marshall
Coldwell Banker Commercial
Commercial Real Estate Advisor
Savannah, Ga
912-790-6999

Keys to understanding opportunities in real estate

By David Sherman | October 2, 2012 10:04 am as seen in http://www.pionline.com

Summary: The savvy commercial real estate investor knows that properties with stable, long term tenants that produce  reasonable (an amount determined by individual criteria) fetch top dollar. Other properties with slightly more risk (expiring leases, high maintenance, vacancy, refinancing needs, etc) are dirt cheap. The goal is to find the mispriced riskier properties, install new management and add significant value, and then sell as a safe investment for a nice profit. Investors are duplicating this process with properties from single family homes to skyscrapers.

Key Memorable Points:

Income is expensive, but bricks are cheap.

As traditional debt capital remains limited, new sources form.

A steady supply of overleveraged assets will continue to come to market.

Fundamentals have bottomed out in most major markets.

Mispriced risk creates attractive investment opportunities.

Read the full article at Keys to understanding opportunities in real estate

A. Joseph MarshallColdwell Banker Commercial
Commercial Real Estate Advisor
Savannah, Ga

Principal Bets on Commercial Property As Bond Yields Fall

I understand that if Putin, Trump or Soros buy gold, even when gold prices are down, investors following that market also buy. And likewise if they sell gold, investors sell their gold, too. The idea is that even you aren't privy to the information Trump, Soros and Putin have, they are doing what they're doing because they have a good reason for it.

The same is true with commercial real estate investors. The big difference is that the information they have is available to all.

Summary: PFG "said it’s turning to real estate to increase investment income as near record-low yields pressure returns from bonds."

Key Quotes:

“The debt market is very strong, the equity market is growing” in commercial property, Chief Investment Officer Julia Lawler said in a presentation to investors today. “The fundamentals continue to improve, largely because there’s a lot of supply constraints.”

 Lawler said her firm has profited by acquiring real estate and attracting new tenants.

“We opportunistically buy distressed properties, lease them up and sell them,” she said. “It’s been a great performer for us.”

If huge multi-national companies are looking to add value to distressed commercial real estate to incease their bottom line, shouldn't you consider it, too?

Read the full article at Principal Bets on Commercial Property As Bond Yields Fall

A. Joseph Marshall
Coldwell Banker Commercial
Commercial Real Estate Advisor
Savannah, Ga

Another prophetic doom and gloom article: Commercial real estate heading for a deep freeze- Part 1 of 3

I am seeing a flurry of buying activity. Investment groups want income producing properties and they want it now at aggressive pricing. I was sharing this with an Atlanta financial advisor and jokingly said, "I think we're all trying to make a buck [create income streams] before the crap hits the fan and the fan breaks."

Only he completely agreed. His high net worth clients are all running for the hills and taking moves now to protect their assets. He then made a few comments about the coming real estate reality. I hoped he was being pessimistic, but here is an article that extrapolates many things he said. If all you're hearing is a rosy outlook, I invite you to read this article and the two future ones for an alternative perspective.

Key Quotes:

"Investing in property is very far from being a safe, one way bet."

"The "proceed with care" warning that should accompany any property investment applies through all stages of the economic cycle. However, it is especially true today. Healthy commercial and retail property markets require two things, namely a ready supply of debt financing and a robust economic environment. Neither of these conditions pertains at present in any major Western economy."

"Among the biggest negatives has to be the fact that as far as lending on property is concerned, there is now a credit crunch that is getting to be as bad as that which followed the collapse of Lehman Brothers in 2008."

"Property lending carries a substantial capital reserve requirement so it makes eminent sense for banks to pull out of commercial property lending, or to make dramatic cuts in the amount that they are prepared to lend. This is extremely bad news for the property markets since it is the equivalent of putting a "deep freeze" on the market."

The full article Commercial real estate heading for a deep freeze- Part 1 of 3 was written by Anthony Harrington, May 14, 2012.

A. Joseph Marshall
Coldwell Banker Commercial
Commercial Real Estate Advisor
Savannah, Ga