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What The Market Told Us Today

May 6, 2010

We were told that a trader put in a “B” (for billion) instead of an “M” (for million). Then we’re told it was tied to the E-Mini futures. Let’s say we’re naive enough to believe the B vs M scenario is accurate. The total market capitalization of the US stock market is probably somewhere around $20T. If a billion dollar trade can lead to a decline of 5% of the US stock market, which is equivalent to about $1T or about 7% of GDP, we have a big problem.

It may have been the traders that panicked today. But when Main Street realizes whose mercy they are really at, and to what degree (since it seems 2009 wasn’t a good enough lesson), what may result is a real sell off. Uncertainty and risk are solidly embedded in today’s equity and real estate markets. Today should be a wake-up call for those that have continued to acquire real estate assets for 5% cap rates that the world has not returned to normal. With the US requiring a solid growth rate just to maintain the current and horrendous unemployment rate, the road back will be long and hard. Aside from pockets of activity, pressure on rents are very likely to remain.

Mix in all the other unknowns which may be coming down the pipes like an implosion of the EUR and cheaper imports from the Euro-zone, further sovereign debt defaults, and retreating retail sales in Q3, a very bumpy road may lie ahead for real estate owners.

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Categories: Commercial Real Estate Investing
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Chris Rodriguez May 7, 2010

Unfortunately, an event like this is likely to create a flight from the equity markets to the "safety" of commercial real estate, further compressing CAP rates and driving prices up as a result. A very vicious cycle indeed. CoStar posted a timely article about CAP rate compression as item #1 on their newsletter today (http://bit.ly/cpwom4 ). I have been seeing this downward pressure on CAP rates for quite a while now and scratching my head because the increase in values is certainly counter-intuitive. Obviously, more demand and less product equals increased prices. The question is why is there an increased demand? My answer: impatience. People are tired of getting 0.25% in money market accounts. People are tired of keeping their money on the sideline waiting for "distressed" opportunities. This impatience has lead to people jumping into a market with limited supply, creating artificially inflated CRE prices. Just my $0.02.

joshua May 7, 2010

one word. algorithms.

Square Feet May 7, 2010

two words. back stop

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