As a commercial real estate broker and investor, I am often asked about the arrival of the low-point of the stressed, distressed, value-add and opportunity property market. "When will we be at the bottom? Are we there yet? Is it this year? Will it be next year? Will the pending CMBS mess push property values lower? When should I get in?" are just a few examples of questions I am fielding. Funny thing is, I don't think we ever actually see the bottom before it passes us by.
That said, I think we are darn close, if not already there. Here are five indicators that it may be time to get into the pool before it is too late:
1. CMBS Mortgage Pools are Selling. Not only are these pools selling (some which contain so called "toxic loans"), but the yields are dropping. GlobeSt.com recently reported: "Spreads on AAA-rated CMBS have narrowed by 100 to 150 basis points as a rally in these securities continues for the second straight month, particularly in five-year triple-A paper, according to a new report from Trepp. Predictably, the spreads have narrowed more on loans backed by stronger collateral, Trepp says. The narrowing has occurred even amid what the CMBS information provider calls "continued negative headlines." Today, the Fed announced a six-month extension to the TALF Program, which is only good for newly issued and legacy triple-A-rated CMBS loans, but they left the door open to include other issuance's if the economy requires it. This trend will open up the debt market, as long as the investors see enough reward in the risks they are taking.
2. The Bad News is At a Crescendo Level. To wit; Reuters; "Commercial property execs expect more bad news", Hernando Today; "Analysts: Disaster looms in commercial real estate", GlobeST; "Property Sales Plummet in First Half of Year", Reed Business Information; "Industrial rents drop on slumping demand", Financial Times; "CMBS delinquencies add $2bn per month"...I could go on and on, but the press and industry insiders and experts are pounding this market day after day with bad news, predictions, and comments, pointing to a pending total industry melt-down and absolute doom. Though this has been like a wildfire jumping from sector to sector, spreading negativity with a "scorched earth policy", I've noticed a marked up-tic in relatively good news. A recent report from the Massachusetts Institute of Technology Center for Real Estate (MIT/CRE), actually goes as far as to say "A commercial real estate price index... posted a staggering 18.1 percent drop in the second quarter. The index, which collects commercial real estate purchase and sales data from leading real estate firms, is now down 22 percent for the year and 39 percent from its peak in Q2 2007" Commercial Mortgage Loans, the author that analyzed the data suggests that "All the bad news, however, is a harbinger of good news. The very best financial professionals know that pessimism is a bullish indicator. A market bottom, by definition, is the moment of maximum pessimism. The sheer magnitude and the incredible speed of the price declines could be an indication that sellers have capitulated and now believe that getting out is more important than getting their price". I find it incredibly interesting that we have to have the lowest of lows in recent history to start our way back up, but this could be true, and good news is starting to trickle out...http://seekingalpha.com/article/153491-commercial-real-estate-record-declines-may-be-good-news
3. The Smartest Players Are Getting Back In The Game: Realty Income (NNN) recently announced that they are back in the acquisitions game. I know the CEO Tom Lewis personally, and think he's one of the most brilliant leaders and thinkers in CRE. When he starts to feel bullish, it makes me think we may be at our near the bottom.
Recently, CB Richard Ellis Investors suggested that the slump in pricing could be over. http://nreionline.com/finance/news/slump_nearly_over_says_cb_richard_ellis_investors_0810/index.html CBRE has access to the best research, real time market activity, have penetrated all financial and real estate segments and have unmatched U.S. and international market coverage. If they think we are at (or near) bottom on pricing...well, who am I to argue? Also, I’ve noticed that some smart retailers and others are taking advantage of the downturn to get access to excellent real estate at fire sale pricing. This type of activity should lead value-add investors into the pool too.
4. U.S. Housing Woes May Have Bottomed Out. Residential experts are predicting an imminent flattening out or an end to the housing financial crisis. Small "shafts of light" are entering the dark depths, such as; pending sales are increasing a smidgen, prices are not falling quite as fast, monthly sales are increasing slightly, activity and pending sales are up a bit, foreclosures are abating a little, builders are building...OK, well that might be a bit aggressive, but nationally the news is improving a titch. Face it; we need a housing financial re-birth to lead us out of our doldrums. Sam Zell recently said, "The key to everything is single-family housing because that's where consumption comes from," Zell said. "If people don't have confidence in their biggest asset, they won't have the confidence to spend." This confidence will drive spending, which leads to jobs-which drive commercial real estate metrics. Keep track of housing or you might miss a big indicator.
5. Capital is Returning to Real Estate. The U.S. REIT and Real Estate Funds markets have had significant success in raising money to pay down debt and for property acquisitions. There are more IPO's to follow. In July and the first week of August there were approximately 25 new registrations alone. This new money is clearly earmarked to buy distressed assets. When the big boys start buying, the bargains may be waning. Recently, I read of competition in the debt market in a Reuters article. I especially like this quote “recent signs of "aggressive" competition to fund office properties, including from insurance companies and foreign banks, mean borrowers could find it tougher to seek breaks on existing loans, the analysts, led by Darrell Wheeler, said in a research note. With more access to funding, they argued, prices would be buoyed, making foreclosures viable alternatives". http://www.reuters.com/article/bondsNews/idUSN1430571420090814 Hines REIT, Brookfield Properties and other big players are eying IPO’s. Cash will be king and the treasures will be there.
There are a myriad of indicators that can and do signal the fall of a market, but there are not as many clear indicators cuing investors of the very bottom. The aforementioned five should be clear hints that we are either at, or very close, and as most savvy investors know, you won’t actually see the bottom until it’s passed you by.
As you consider whether or not to dip your toe into the pool, remember that money is made in down markets, and those most successful are willing to take the additional risks and stand to do the best. When investors are closing deals all around you, it will be too late to be called one of them.
Michael K. Houge, CCIM, SIOR
(Chief)
"The bad news is at a crescendo level."
ReplyDeleteThis is the big one for me Michael. When everyone is screaming about the bad news, it's probably time to start thinking about how to take advantage of it. Waiting on the sidelines until a recovery is already in the rear-view mirror will have such a high opportunity cost that those with the means need to be thinking about getting back in the game now.
Great post; I'll be sharing this one!
Michael, we are all looking for the signs that the bottom is here. Great post and great blog - hopefully things are turning.
ReplyDeleteTodd
Very interesting site you got here. I found it randomly while looking through fans of Mark Levin on blogger. I am a grad student in Chicago and an aspiring writer with a blog of my own (rjmoeller.com). Check it out some time. Take care.
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