Tag Archives: offices

Sam Zell Sees Little Damage, Quick Recovery, in Commercial Real Estate — with Mortgage Backed Securities Leading the Way

Billionaire real estate investor Sam Zell has never been shy about expressing his views or going against majority opinion. 

He has embraced the description of himself as a “contrarian” — and not only in regard to investment strategies.  

While just about everyone else has been publicly sympathetic to the many thousands of people who’ve been forced into or close to foreclosure, Zell told an audience last week at the Milken Institute Global Conference in Los Angeles that “What this country needs is a cleansing” in the residential market. “We need to clear out all of those people who should never have been in houses in the first place and who for sure shouldn’t be getting sympathy,” Zell said.

The blame for the current housing slump, according to Zell, isn’t the financial industry’s subprime mortgage practices or overbuilding by contractors.  Rather, the blame belongs to the federal government’s policy of “encouraging homeownership at any cost.” The rise in the U.S. homeownership rate from 63% to 69% during the boom was totally unjustified, Zell said, other than by “the political impetus of, ‘Let’s put more people into homes they can’t afford.'”

Zell, of course, is perhaps the nation’s largest apartment owner. 

As Chairman of Equity Group Investments, Zell controls Equity Residential, the largest publicly traded owner, operator and developer of multifamily housing in the United States with nearly 160,000 apartments in 25 states and the District of Columbia.  And, as we’ve noted in an earlier post, the apartment industry has adamantly opposed federal aid to homeowners facing foreclosure and blamed the housing crisis on what it has called the “misguided” national policy of “home ownership at any cost.”

Zell also went against majority opinion this week when he asserted that the real estate crisis was just about ended, as least for commercial properties, and mortgage-backed securities would be leading the comeback. 

According to Zell, institutional investors are beginning to return to the market for mortgage-backed securities to finance commercial real estate deals and new construction. “I believe the overall market has already started to ease,” Zell said. “Is it in large volumes? No. Is it the first natural step in the evolution? Yes.”

In particular, Zell did not see real damage being done to office properties.  His former company, Equity Office, which he sold to The Blackstone Group in February 2007 for $39 billion, is the largest owner of office buildings in the United States. 

“I’m sure there’s going to be some casualties, particularly in what I would call ex-urban, the glass-block commodity office building,” he said. “I don’t think there is going to be any casualties in Manhattan. I don’t think there’s going to be any casualties in any of the first-class office space around the country. The commercial real estate market is going to do terrific no matter what the economy does, short of a depression.”

On this point, we think he’s probably right.

We wouldn’t want to argue with a real estate investor who has been smart enough to become number 164 on Forbes Magazine’s list of the richest people in the world.

On the other hand, Zell told an audience at the Wharton School last September that the turmoil in the financial markets was only an “emotional reaction” that would soon stabilize.

He was wrong on that one.

And he does own the Cubs.

 

 

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Commercial Real Estate Still Resisting Slump — But Caution Advised

Standard & Poor’s announced the results of it’s January S&P/GRA Commercial Real Estate Indices (SPCREX) yesterday, showing that commercial real estate prices across most sectors are either holding steady or still rising despite the subprime crisis and the free fall in the residential housing market.

According to David Blitzer, Managing Director and Chairman of the Index Committee at Standard & Poor’s, “The National Index was relatively flat for this month and all sectors and regions are losing momentum compared to a year or two ago. At the same time, there were some big moves in the individual components.”

More specifically, the report found a national composite annual price appreciation of 7% from January of 2007, up from the 6.7% price increase reported in December’s data but still far below the 14.5%, peak price increase reported in June of 2006.

In the property sector, Warehouses reported the biggest gain for the month with a 1.9% increase and a 12 month increase of 10.1%. Office reported the only monthly decline of 0.2%, but has still returned 9.9% over the past 12 months. Apartments and Retail reported annual gains of 5.8% and 4.3%, respectively, from January of last year.

Among the regions, the Northeast had the highest return over the previous month at 1.4%, as well as the highest annual return over the past 12 months at 9.4%. The Desert Mountain West reported the largest price declines in the January/December period at -1%, but still remained marginally positive (up 0.9%) on an annual basis. The Mid Atlantic South and Midwest regions also reported slight declines.

Blitzer cautioned against reading too much that was positive into the data.

“Compared to residential property price trends, the impact of financial market developments remains unclear for commercial property,” he said.  “We do need a few more months of data to see if this market is going to remain relatively healthy or follow in the path of the U.S. housing market.”

We think that apartments will increase or hold their value as more homeowners are forced back into renting.  We also think that slower retail sales will eventually have a negative impact on retail real estate, at least in certain regions, and that the office sector, particularly in areas hit hard by the residential meltdown, will also suffer. 

We think too that, even more than residential real estate, the value of commercial real estate will depend on the health of the local economy.  In areas where the local economy is still strong, such as Austin, Denver, Seattle, and New York, commercial real estate prices will continue to increase.

On the other hand, where we work — Irvine, California, the epicenter of the subprime mortgage meltdown — we expect sharp decreases in value, partcularly in the office sector.

Bascom Group Expands Reach for Distressed Real Estate

Another major player has expanded its participation in the distressed real estate market.

Bascom Group, an Irvine, California, real estate (apartment) investment and asset management firm, has announced a new joint venture called Bascom Portfolio Advisors (BPA) that will target distressed multi-family, office, industrial and retail properties in markets throughout the nation,  including broken condo deals.

According to the Bascom Portfolio Advisors’ press release, “In anticipation of looming credit problems stemming from impending loan maturities, potential capital imbalances and decreasing property values, BPA offers workout expertise. Through a range of consulting services, BPA will evaluate distressed assets, identifying financial, operational and market driven issues and present effective solutions to optimize asset values and minimize losses. BPA has resources in place to implement work out solutions, including, asset management/oversight, new capital infusion, and assistance with liquidation.”

Bascom Group has previously engaged in several other join ventures in the distressed property market, including a 2006 joint venture with the private equity firm Warburg Pincus Real Estate I, L.P. to invest up to $200 million in non-performing loans and distressed multi-family properties and both non-performing and sub-performing loans by investing in the underlying senior and mezzanine debt instruments.

We noted in a recent post that major investors, fueled by domestic and foreign investment groups, wealthy individuals, endowments and pension funds, are about to spend billions of dollars buying distressed debt and real estate.

We think that Bascom Group’s announcement is further evidence that there is currently no hotter market than distressed real estate, and that major investors are ready to scoop up distressed properties with significant equity or which they believe to have been mismanaged.