GE To Cut Real Estate Portfolio by More Than 10% Next Year

Costar is reporting that GE is planning a $10B haircut to its real estate holdings next year. This comes at a time when the cost of capital is increasing, its availability decreasing, and the supply of real estate assets available for sale will be spiking (think Lehman, AIG, Merrill, just to name a few).

The Fed has talked about lowering interest rates shortly and that might help deal with the problem, but the writing is on the wall. Rental and occupancy rate uncertainty, increasing costs of capital, and increase in supply clearly indicate that cap rates will continue to rise unless the credit markets are somehow unclogged.

It will be an interesting scenario for developers - who for the past several years have been using alarmingly low cap rates to underwrite deals - when they find themselves in a situation where the market is looking for a capitalization rate 200 basis points or more higher than what they had forecasted.

I’ve even seen a proforma as recently as early this year for a $100M+ project in San Jose whereby the exit sales number for the development project was a nice big round number, and the cap rate looked like something they pulled out of a hat (or worse), clearly indicating the developer was working backwards from a per square foot sales price! Go figure that out.

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