The Return

My apologies for such a lengthy absence from my blogging activity, I trust our posting of articles has been informative and a source of quick reference points.

Highlights from last week included the revelation that Blackstone will begin the process of shedding its office portfolio.  The interesting aspect of the announcement/article was the acknowledgement that many of the assets were purchased at the peak of the office market and valuations have now returned to pre-Recession(Depression) levels.   I would submit that valuations are being driven by capital flows and not underlying real estate fundaments.  Would the following aspects of our economy typically drive real estate values?

• Record high unemployment that has shown little signs of improvement
• Europe in a mess with Greece, Spain and Italy faltering
• Ireland remaining in a malaise
• UK booming due to Olympics (what happens after the Games)
• Extreme political uncertainty with strong leftist leanings

I could continue, but you all read the news.  So what is driving core real estate valuations?  My theory:

1. Where can institutional investors get yields over 4%?  I am not an investment professional but I would assume that yields over 4% come with rather inflated risks.
2. Fixed rate debt financing can be obtained with 40% equity, at sub 4% interest rates for the core real estate we are seeing trading.
3. POSTIVE LEVERAGE and no good alternative investments, at least I can see an office building and it is not filled with the mystery of derivatives (JPM learned a lesson on this)

Interestingly, there is another side to the story.  I recently advised a small town real estate owner on a liquidation of his family’s holdings.  The cap rates we discussed and agreed upon were in the 11% range.  You borrow at the local bank at 5% and your POSTIVE LEVERAGE looks like Apple stock.  But think of the money the seller has left on the table due to the inefficiencies in the local real estate markets.

I honestly cannot decide if I am positive or negative, however I do think opportunities exist with a working knowledge of the math I mention.