Commercial Real Estate Blog

Slow down? What slow down. Construction material prices in many markets around the world continue to increase rapidly. In the UAE for example, the cost of steel has risen by about 15% this month alone, with the expectation that prices might rise a further 5% in the ensuing week.

The global demand for rebar sits at about 218M tons, with the Middle and Far East representing roughly 65-70% of that demand. In fact, in the Gulf states, the value of civil projects comes in at a whopping $1.5 TRILLION. Middle East rebard demand for instances, is roughly 15 times that of the United Kingdom, and several more million tons that demand for reinforcing bar in the United States.

Layer on energy prices and rising headline inflation rates around the world and it is easy to see that construction prices, even in the face of the slowdown we are in, are not abating, and will only likely do so when MEA markets slowdown.

A conspiracy is nothing but a secret agreement of a number of men for the pursuance of policies which they dare not admit in public.” - Mark Twain

Normally I don’t get to engrossed in conspiracy theories and the such, but what is happening with oil and the financials and the dollar is becoming so gross that it is difficult to ignore. We talk about here the impact, whether directly or indirectly, all these forces have on the commercial real estate market and the general situation we find ourselves in today, but I felt compelled to write a post about what I believe is happening with the economy, financials, and the bailout underway at the hands of the populace.

First, a graph showing the Dow Jones Financial Services Index vs an ETF tracking the price of crude oil since the credit freeze began in earnest last summer (click for full-size).

I am of the camp that is fascinated by Wall Street. The ability with which Wall Street has managed to screw up, only to find a creative solution to the problem has been one which amazes me. They’ve managed to do this time and time again. This time, it goes without saying, they’ve managed to dig a giant hole. One where losses are into the hundreds of billions, with some estimates pegging total losses to be at over a TRILLION dollars when this is all said and done. That’s a lot of cheddar.

It seems Wall Street has again found a cure. Over the past few years, we’ve started to hear the term Sovereign Wealth Funds (SWF). These are funds which are state-owned investing in assets, projects, and securities worldwide. Over the past year, since the credit meltdown hit Wall Street, SWF have been running around Wall Street investing in everything from Citigroup, Morgan Stanley, Merrill Lynch, and real estate as well to the tune of billions and billions of dollars.

The SWF of Kuwait, UAE, and Saudi Arabia seem to me to be working in concert with the investment banks to bail them out. The same investment banks who are blaimed for “speculating” the oil price to where it is right now are benefitting from huge cash infusions from the very same SWF benefitting from high oil prices.

Thus it is easy to see that Wall Street has once again managed to find a cure by getting the public to bail them out at the gas pump. The investment banks drive the price of crude up (and thus gas prices). The money flows into the oil producing countries and their sovereign wealth funds, which in turn reinvest the premium the investment banks created for them back into our financial institutions, with all of this financed by the public without having to mess with a tax increase or a congressional bailout replete with lobbying, hearings, public scrutiny or outcry. Absolutely Genius.

Valter Mainetti and his Sorgente Group have acquired a majority piece of the Flatiron Building in New York. Estimated to be worth about $180-190M, the Flatiron building is a landmark building sitting at the intersection of Fifth Avenue, Broadway, and 23rd Streets.

In another notable deal, Abu Dhabi investment council (United Arab Emirates) is currently in negotiations to acquire a 75% stake in the Art-Deco Chrysler building. The deal would value the building at about $1 Billion. The building is on a 140+ year ground lease from Cooper Union with the remaining 25% stake being owned by Tishman Speyer.

High oil prices and the weak dollar have made New York a prime target for middle eastern investors and sovereign wealth funds. For Europeans, the weak dollar has spurned tourism and investment in the United States, from flats and vacation homes, to institutional grade real estate assets.