Published February 15th, 2011
"Price is what you pay. Value is what you get."
- Warren Buffett
While this may seem obvious there is concern that the lines may be blurring in today's real estate markets. A lot of money has been sidelined since the market crashed three years ago, and it's getting impatient. Seemingly distressed assets can get bid up to close to pre-crash values, while the truly discounted properties (and real values) are mostly passed over as too risky. The challenge, of course, is how to assess value and over what time period. Too many investors are using bubble era valuations as the benchmark without taking into consideration the fundamental economic outlook. While the economy may be out of the ICU it is still hooked on a lot of life saving measures. True value judgments in real estate today must be forward-looking and long-term. This is where real patience will pay off.
Commercial Real Estate
Commercial Real Estate's Uneven Return
Commercial property took less of a drubbing than residential real estate in the recession but still faces a long and painful recovery. Banks have already taken $80 billion in commercial-real-estate losses—about half of what they are expected to take as a result of the recession, according to the Federal Reserve. But in some markets, commercial-property values have soared more than 30% from their lows in 2009, according to one industry gauge. For properties such as marquee apartment buildings in New York City and office buildings in Washington, D.C., values are even approaching pre-crash levels.
Full Story (WSJ)
Office Vacancy Drops, Lease Rates Languish
According to a new report by Colliers International, the U.S. office market entered the year on a relatively strong note after the fourth quarter, with a sharp drop in vacancy and a healthy increase in occupied space. But rents continue to languish, according to Ross Moore, chief economist at Colliers International and author of the report. The fourth quarter marked a key turning point toward recovery, he says. “With the economy now posting robust growth, all that is needed for a full recovery is a surge in employment.” With the economy making strides, and the addition of private sector jobs, leasing markets are expected to continue improving as 2011 unfolds.
Full Story (NREI)
To Default Or Not To Default
Borrowers in today’s commercial real estate market face the daunting dilemma of deciding whether to default on their loans as a way to secure discounts in a struggling economy. According to “To Default or Not Default? That Is the Question,” the latest podcast by John B. Levy & Co., commercial real estate owners are considering loan default as a viable strategy for managing troubled debt at a time when access to money has become tight.
Full Story (NREI)
Residential Real Estate
Crash Hitting Cities Thought To Be Stable
Few believed the housing market here would ever collapse. Now they wonder if it will ever stop slumping. The rolling real estate crash that ravaged Florida and the Southwest is delivering a new wave of distress to communities once thought to be immune — economically diversified cities where the boom was relatively restrained.
Full Story (NYT)
Finance & Economy
Outlook Turns Bullish For Capital Flows
Despite risks that can't be ignored, experts foresee bright times ahead for the already much-improved debt markets in 2011. Commercial mortgage markets improved dramatically in 2010, observers say, and that improvement is expected to continue throughout this year.
Full Story (GlobeSt.)
Securitization Market Still Dormant
The securitization market is slowly awakening. So says Tom Muller, real estate & land use partner at law firm Manatt, Phelps & Phillips in Los Angeles. Smaller, specialized securitizations have been placed in the last two years and we're beginning to see some initial interest in larger, more diversified offerings.
Full Story (GlobeSt.)
Imagining Life Without Fannie And Freddie
A report to Congress from the Treasury and the Department of Housing and Urban Development, published on Friday, provided some long-awaited analysis by the Obama administration about what went wrong in housing finance — and how to fix it. The report, entitled “Reforming America’s Housing Finance Market,” zeros in on the perverse incentives created by the nation’s mortgage complex during the years leading up to the panic of 2008. The Treasury’s recommendation that we wind down and and let the private mortgage market step in is spot on.
Full Story (NYT)
What Is The New Normal Unemployment Rate?
In the past, the U.S. labor market has proven to be very flexible and recessions have not usually been followed by long-lasting increases in the unemployment rate. But, in the wake of the most recent recession, many economists are concerned that developments such as mismatches in the skills of workers and jobs, extended unemployment benefits, and a rise in long-term joblessness may have raised the “normal” or “natural” rate of unemployment above the 5% level that was thought to be typical before the downturn. Indeed, a few economists have gone so far as to argue that the rise in the unemployment rate to its current level of 9% primarily reflects an increase in the natural rate, implying there is little slack in labor markets and therefore little downward pressure on inflation. This Economic Letter examines evidence regarding changes in the natural rate of unemployment in the United States since the recession began.
Full Story (FRBSF)