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Sam Zell Optimistic on Economy

November 12, 2009

Sam Zell, of Equity Office fame, has come out indicating that the commercial real estate calamity is overblown. He is basing his premise on two things, one the workouts and other programs in place that are keeping a lot of deals from being sold, though one could argue on life support. The other is that in 2011 and 2012, we will have rebounded and economic activity will be sufficient enough to fill vacancies, though he notes at a significant rental discount.

Mr. Zell, the billionaire real estate investor who has been maligned for his bad bet on the Tribune Company, told a roomful of investors this week that fear of defaults in the commercial real estate market has been “greatly exaggerated,” according Crain’s Chicago Business.

With enough private investment and public subsidies, deals can be kept on life support for quite a bit of time, there’s no doubt about that. Perhaps long enough for the market to come back as Sam Zell believes. Remember from the latest Federal Reserve Survey, 70% of banks have indicated that more than 25% of their commercial mortgages have had their maturities extended.

But at what cost does all this come at and what happens once you introduce higher interest rates into the equation? What happens if leasing velocity doesn’t return with a vengeance or job creation is slow. What happens if the stock market falls and if unemployment goes to 13% as some (David Rosenberg for example) are now predicting.

The biggest problem we see is uncertainty, that is, investor confidence. If an investor feels confident that things are coming back, then he or she will make the big bets. If not, they will want the bargain basement price and are unwilling to stretch leaving the market in a state of paralysis.

But the way things are going one thing seems fairly certain, and that is unless banks and the government are willing to make some big sacrifices, somebody, be it the taxpayer (most likely) or banks will be saddled with the debt, which will prove to ultimately be a drag on GDP.

[via NYT DealBook]

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Categories: Commercial Finance and Lending | Commercial Real Estate Investing | Trends
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Joshua November 12, 2009

the second paragraph really is the key. it COULD happen zells way. but the govt has basically said they wont throw cash at CRE but that they will be favorable to banks. the employment issue will be a major issue for YEARS to come. so, the CRE mess can be extended and massaged to make it for 2, 3, 7 more years. but then what? when our economic situation is stagnate or slowly growing how does that FIX the issue with CRE loans/properties traded at highs? it fixes nothing. thats the arbitrage. how much can you squeeze out before getting out.

Froggy November 13, 2009

Rents are rents period. If you lost a tenant and replace them for 25% lower rent, you just ate some TIs and your NOI is impaired. If you paid top dollar for that asset in 04-08, you are not getting that NOI back in time to refi the deal anywhere near your purchase loan was. That is not to mention that LTV parameters and spreads are less favorable, and full recourse is what’s for dinner. Cap rates will not dip below 7% until all of the CMBS trash is flushed out well into the next decade, so he’s way off base here. Kudos on selling his office at the top, but he gave a lot back on the Tribune deal.

At ICSC in May, he said residential was going to bottom out this summer. Not so much. Zell likes to hear himself talk, and he isn’t the stakeholder that he once was so he doesnt’ really care what he says.

Tampa Commercial Property Agent November 15, 2009

New FDIC guidance from 2 weeks ago shows what the govie can do without “throwing money” at the problem. I tend to agree with Zell. We are in for some tough times, but the prediction of supreme apocalypse is very exaggerated.

Eric W Odum

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