April 29, 2009
Spotted at Deal Junkie is a video of Sam Zell at the Milken Institute Global Conference. Some of the things discussed include:
- From 2003 to 2007, 50% of the institutional real estate traded – and that 50% ended up being over-leveraged
- More debt than value, equity guys are out of the market until there are foreclosures
- Smart money is chasing debt
- Sellers don’t have any equity, therefore no incentive to sell
In addition to Sam, there is additional discussion about CMBS, leveraging, etc. One of the most interesting observations is made by Randy Mundt of Principal Real Estate Investors, where he said CRE borrowing headed to about 25-26% of GDP during this cycle, eclipsing the 21% peak during the late 80′s/early 90′s. During the deleveraging through 97, that number fell to about 12% of GDP. Related to the discussion was concern about Principal’s outstanding loans and uncertainty about repayment – Principal REI is one of the financiers of Sand Hill Properties’ Main Street project in Cupertino, which is sitting essentially in limbo because of market financing hurdles.
From the Milken Institute’s web site, there is a summary of the panel discussion, which included Scott Minerd (Guggenheim Partners), Randy Mundt (Principal Real Estate Investors), David Simon (Simon Property Group), Frits van paaschen (Starwood), and Sam Zell (Equity Investments):
The overall economic slump has hit the commercial real estate market hard, but with the help of government programs and investors abroad, opportunities exist for growth in the sector.
While much of the commercial real estate market has avoided a downturn as steep as that in other sectors, there is cause for concern. Sam Zell said too much leveraging between the booms of 2003 and 2007 is largely to blame for today’s slump.
“We all drank too much Kool-Aid,” Zell said. “Between 2003 and 2007, 50 percent of institutional real estate was traded but was overly leveraged. The result is that today there are few of those financings that are above water.”
Randy Mundt of Principal Real Estate Investors said the overall economic downturn has led to a severe decline in demand for office space. “Layoffs mean a lot of office properties are unoccupied; these properties may end up losing about 40 to 45 percent of their value,” he said.
Despite the downturn, the panel discussed the possibility of investments in commercial real estate coming from abroad. “We will see more money coming from outside the U.S. to buy real estate here,” Frits van Paasschen predicted. “As prices continue to come down over time, we will continue to see more of that.”
All the news is not bad. “The good news is the government is extremely focused on commercial real estate; they realize it could be the next shoe to drop if something isn’t done,” David Simon said. But the help of the government – especially the Federal Reserve and the Treasury Department – in shoring up the commercial real estate market may not be a long-term boost. “With all of this government intervention, we will have to see if it is a short-term fix or a long-term shift in ideology that will help the commercial real estate market down the road,” Mundt said.
Van Paasschen views the intervention as a not-so-perfect solution that is having at least some effect. “As flawed as the programs may be, they have taken the panic out of the market,” he said.
In the end, the panelists seemed to agree that times are tough for the commercial real estate market but possibilities for a rebound exist. “We’ve got losses as an industry that we need to take, and we’re going to have to deal with it,” Simon said. With the help of the federal government and overseas investors, the outlook is not completely dire. But the need for investors of commercial real estate within the U.S. remains.
“There was something elegant about President Bush’s ‘go out and shop’ statement to American consumers in response to 9/11,” Simon said. “If we could just get people to do that now, things could get better much sooner.”
- Sam Zell Optimistic on Economy
- Wilbur Ross, Sam Zell, Richard LeFrak on CNBC – The Billionaire’s Roundtable
- Sam Zell Tells Wilbur Ross To Piss Off
- Equities, Real Estate, and Deflation
- DDR Issue Signals Slow Return of CMBS Market