Regaining Perspective

Did You Know?
Since 1837, there has never been a property peak without a new skyscraper claiming to be ‘the world’s tallest’.
· In July of 2007, London’s The Register ran following headline: “Dubai Claims World’s Tallest Building Title”.

From 1873 until today, there has never been a property peak without the cost of copper exploding.
· The price of copper cathode peaked in April of 2008 at $3.94/lb.

An inverted yield curve has always pre-dated the decline of property values from their peak.
· The yield curve (the relationship between interest rate with different maturities) was inverted during much of 2006 (meaning short-term interest rates were higher than long-term rates).

Over the last several years, these and other warning signs of a pending real estate crash were trumpeted by the media. However, in boom times, real estate owners, tenants, bankers, brokers, investors tend to get caught up in the growth story and lose perspective. Many of the decision-makers during the recent rise in values had never even experienced a downturn.

According to the Moodys/REAL Commercial Property Price Index, commercial property prices, on the whole, have fallen 41% from their peak in October 2007 – and now are equivalent to where they stood in 2002.

According to the Congressional Oversight Panel, there are $1.4 trillion in commercial real estate loans coming due between 2011 and 2014. Given current conditions, finding a home for these loans will be impossible since the financial system is clogged with enormous amounts of toxic real-estate paper that will not repay according to its terms. What’s worse is that this paper has been levered up significantly through structured financial instrument such as CMBS and CDOs. The COP estimates that nearly half of the loans coming due are underwater — meaning the borrower owes more on the loan than the property is worth. For borrowers with well-performing properties, they may also have a difficult time refinancing their loans as lenders continue to tighten underwriting standards. Bank failures – particularly community banks – will continue due to loan losses.

Despite all this grim news, owners’ asking prices remain high – as they are unwilling (or unable) to settle for less than their initial investment. On the whole, banks also are reluctant to take haircuts. And many brokers continue to communicate asking prices/rents that have long since become outdated.

For those who took heed of history’s lessons and headed to the sidelines early, there will be abundant buying opportunities in the near term. ”If you can wait and not be tired by waiting” – a line from Rudyard Kipling’s poem “If” comes to mind.


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