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On What Basis?

October 2, 2009

The co-founder of Green Street Advisors, Mike Kirby, says CRE may have bottomed. Just 3 months ago he indicated that prices were down 40%, and they were to drop more. What has happened between June and now? Not much, aside from a bunch of money pouring into REITs. On the one hand, one can argue that the REITs and private equity funds, essentially fueled and financed by OPM will have the incentive (fees) to get the market going again and that we have bottomed.

On the other hand, you have deflationary pressures, increasing unemployment rates, debt maturities outstripping available financing, and an equity market that has REITs trading for 110% of asset value (according to the article) and a case as to why we haven’t yet bottomed.

It would be interesting to hear what side readers of this post come down on.

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Froggy October 2, 2009

Just because IT hasn’t happened yet doesn’t mean its not happening. I’m looking at a deal that sold for $15MM 2 years ago with a $10MM conduit loan in default on it. It’s 60% vacant, well located, and in mint condition. The servicer appraised it at $5.3MM! There are tons of those out there that can’t lease at market because they would’nt cover the debt service. Nothing can save this deal for the borrower or the lender and so it will continue until low cap rate/high leverage deals get blown up and bought with equity. Equity ain’t easy to get so… This CRE market is just starting to show its ass.

squarefeet October 3, 2009

Thanks for the comment. The deal you describe is about two-thirds off the highs. There have been some other recent transactions in the same range which have happened over the past 2-3 months.

So my question for you and others is, overall, do you think 60% off is the bottom, or will prices slide even more?

Froggy October 3, 2009

WRT calling a bottom, pricing isn’t the only consideration. Pricing is one thing, timing is another. Who knows if 60% down is the bottom, the point is that whatever the bottom is we are going to be hanging out there for some time.

Damian P October 5, 2009

We have more to go…take the Fremont deal as an example that just sold. $38 per square foot – but empty out commissions, improvements, vacancy, and the cost of sprucing the place up, and it’s not a mind blowing deal. There are a lot of “ifs” involved.

Some investors will jump in, but overall, that is not a deal that would likely be done by most and perhaps that is why UBS decided to bail as it no longer made any sense as the project continued to age and didn’t fit their profile. So we will get some deals transacted at this price level, but we have more downside to go, particularly as we get into the bigger assets where big chunks of financing will be hard to find.

With the CMBS market dead and the appetite of investors to buy a piece of something chopped up into a million different pieces and tranches gone, we’re going to see further drops.

RUKM October 5, 2009

I think the biggest risk here is stagflation, not deflation. First phase is housing weakness, followed by dollar weakness. We will see a Euro at 2 before we see 1 again. And thanks to our leadership, we are so dependent on imports that inflation will get us

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